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— »T H E 


The Shocking Truth About Our Money System 
And How We Can Break Free 





The Shocking Truth 
About Our Money System 
and How We Can Break Free 

Third Edition 
Revised and Expanded 


Third Millennium Press 
Baton Rouge, Louisiana 

Copyright © 2007, 2008 
Ellen Hodgson Brown 

All rights reserved. No part of this book may be reproduced or transmitted 
in any form or by means, electronic, mechanical, photocopying, recording, or 
otherwise without the prior written permission of the publisher. 

First edition July 2007 
ISBN 978-0-9795608-0-4 

Second edition revised and updated February 2008 
ISBN 978-0-9795608-1-1 
Third edition revised and expanded March 2008 
ISBN 978-0-9795608-2-8 

Cover art by David Dees 

Library of Congress Control Number 2008900963 
Includes bibliographic references, glossary and index. 
Subject headings: 

Banks and banking - United States. 

Debt - United States. 

Developing countries - Economic policy. 

Federal Reserve banks - History. 

Financial crises — United States. 

Imperialism - History - 20 th century. 

Greenbacks — History. 

Monetary policy. 

Money - History. 

United States — Economic policy. 

Published by Third Millennium Press 
Baton Rouge, Louisiana 
Printed in Malaysia 

ISBN 978-0-9795608-2-8 



Acknowledgments ix 

FOREWORD by Reed Simpson, Banker and Developer xi 

INTRODUCTION: Captured by the Debt Spider 1 




1 Lessons from The Wizard of Oz 11 

2 Behind the Curtain: The Federal Reserve 

and the Federal Debt 23 

3 Experiments in Utopia: Colonial Paper Money 

as Legal Tender 35 

4 How the Government Was Persuaded to Borrow 

Its Own Money 47 

5 From Matriarchies of Abundance to 

Patriarchies of Debt 57 

6 Pulling the Strings of the King: 

The Moneylenders Take England 65 

7 While Congress Dozes in the Poppy Fields: 

Jefferson and Jackson Sound the Alarm 75 

8 Scarecrow with a Brain: 

Lincoln Foils the Bankers 83 

9 Lincoln Loses the Battle with the Masters 

of European Finance 91 

10 The Great Humbug: The Gold Standard 

and the Straw Man of Inflation 97 



11 No Place Like Home: 

Fighting for the Family Farm 107 

12 Talking Heads and Invisible Hands: 

The Secret Government 115 

13 Witches' Coven: The Jekyll Island Affair 

and the Federal Reserve Act of 1913 123 

14 Harnessing the Lion: The Federal Income Tax 133 

15 Reaping the Whirlwind: The Great Depression 141 

16 Oiling the Rusted Joints of the Economy: 

Roosevelt, Keynes and the New Deal 151 

17 Wright Patman Exposes the Money Machine 161 

18 A Look Inside the Fed's Playbook: 

"Modern Money Mechanics" 171 

19 Bear Raids and Short Sales: 

Devouring Capital Markets 181 

20 Hedge Funds and Derivatives: 

A Horse of a Different Color 191 



21 Goodbye Yellow Brick Road: 

From Gold Reserves to Petrodollars 203 

22 The Tequila Trap: The Real Story 

Behind the Illegal Alien Invasion 215 

23 Freeing the Yellow Winkies: 

The Greenback System Flourishes Abroad 223 

24 Sneering at Doom: 

Germany Finances a War Without Money 233 

25 Another Look at the Inflation Humbug: 

Some "Textbook" Hyperinflations Revisited 239 

26 Poppy Fields, Opium Wars and Asian Tigers 249 

27 Waking the Sleeping Giant: 

Lincoln's Greenback System Comes to China 257 

28 Recovering the Jewel of the British Empire: 

A People's Movement Takes Back India 265 


29 Breaking the Back of the Tin Man: 

Debt Serfdom for American Workers 277 

30 The Lure in the Consumer Debt Trap: 

The Illusion of Home Ownership 285 

31 The Perfect Financial Storm 293 

32 In the Eye of the Cyclone: How the Derivatives 

Crisis Has Gridlocked the Banking System 301 

33 Maintaining the Illusion: 

Rigging Financial Markets 313 

34 Meltdown: The Secret Bankruptcy of the Banks 325 



35 Stepping from Scarcity 

into Technicolor Abundance 337 

36 The Community Currency Movement: 
Sidestepping the Debt Web 

with "Parallel" Currencies 347 

37 The Money Question: 

Goldbugs and Greenbackers Debate 357 

38 The Federal Debt: 

A Case of Disorganized Thinking 367 

39 Liquidating the Federal Debt 

Without Causing Inflation 375 

40 "Helicopter" Money: 

The Fed's New Hot Air Balloon 383 



41 Restoring National Sovereignty 

with a Truly National Banking System 393 

42 The Question of Interest: Ben Franklin Solves 

the Impossible Contract Problem 407 

43 Bailout, Buyout, or Corporate Takeover? 

Beating the Robber Barons at Their Own Game 417 

44 The Quick Fix: Government That Pays for Itself 425 

45 Government with Heart: 

Solving the Problem of Third World Debt 435 

46 Building a Bridge: 

Toward a New Bretton Woods 441 

47 Over the Rainbow: 

Government Without Taxes or Debt 451 



Postscript: February 2008 - THE BUBBLE BURSTS 465 

Glossary 479 

Selected Bibliography of Books and Suggested Reading 487 

Notes 489 

Index 521 


Compound interest at 6% over 50 years 32 

Inflation from 1950 to 2007 103 

Income of top 1% versus bottom 80% 279 

Household debt, 1957 to 2006 286 

M3 money stock, 1909 to 2006 307 

Price of gold, 1975 to 2007 346 

Federal government debt, 1950 to 2015 368 

Federal government debt per person, 1929 to 2007 369 

Stock market (S & P 500), 1960 to 2006 381 



Somebody once said works of art are never finished, just 
relinquished to the world. This research is a work in progress, begun 
when I was a law student in the 1970s but was limited to the material 
available in the library and in journals. With the explosion of 
information in the Internet Age, the missing pieces have fallen into 
place; but while I have been more than five years assembling them, I 
have still found errors, quotes that turned out to be apocryphal, and 
things needing to be updated. I have heavily footnoted my sources 
and quoted extensively, in hopes of aiding the next generation of 
researchers who might be inspired to carry on the pursuit. 

In the half year since this book was first published in July 2007, 
the banking system has been fracturing rapidly, warranting this 2008 
revision and postscript. While I was at it, I refined the prose, eliminated 
errors, and revised and expanded the solutions section concluding 
the book. For future updates, see articles. 

Ellen Brown, February 2008 

To my grandmother Ella Mae Hodgson, 
who died in difficult circumstances 
during the Great Depression; 
and to my parents Al and Genny Hodgson, 
who lived through it. 


This book has been heavily shaped by the feedback of many astute 
friends, who have puzzled over the concepts and helped me to make 
them easy to understand; and of a number of experts who have helped 
me to understand them myself. Georgia Wooldridge advised on 
structural design with an architect's eye. Bob Silverstein looked at the 
material with a sharp agent's eye. Gene Harter and Lance Haddix 
reviewed it from a banker's perspective. My children Jeff and Jamie 
Brown challenged it as graduate students in economics. Paul Hodgson 
gave the libertarian perspective. Lawrence Bologna and Don Bruce 
did detailed editings. Duane Thorin brought a fresh critical approach 
to the material; and Toni Decker, who purports to know nothing about 
banking, spotted issues Alan Greenspan might have missed. Important 
insights were also added by Nancy Batchelder, Eddy Taylor, Richard 
Miles, Bruce Baumrucker, Paul Hunt, Bob Poteat, Nancy O'Hara, Tom 
Nead, David Edgerton and Bonnie Lange. Among the experts, Ed 
Griffin, Ben Gisin, and Reed Simpson clarified the mysteries of 
"fractional reserve" banking; Sergio Lub, Tom Greco, Carol Brouillet 
and Bernard Lietaer illuminated community currency concepts; and 
Stephen Zarlenga did exhaustive research on the Greenback solution. 
Valuable insights for revisions were provided by Alistair McConnachie, 
Peter Challen, Rodney Shakespeare, Frank Taylor, Glen Martin and 
Roberta Kelly. Cordell Svengalis was responsible for formatting, 
Charles Montgomery experimented with graphics, and David Dees 
captured the theme in a brilliant cover. Cliff Brown made this book 
possible. Acknowledgment is also due to Michael Hodges and for the charts, and to all those researchers who 
uncovered the puzzle pieces assembled here, who are liberally cited 
and quoted hereafter. Thanks! 



Banker and Developer 

I have been a banker for most of my career, and I can report that 
even most bankers are not aware of what goes on behind closed doors 
at the top of their field. Bankers tend to their own corner of the bank- 
ing business, without seeing the big picture or the ramifications of the 
whole system they are helping to perpetuate. I am more familiar than 
most with the issues raised in Ellen Brown's book Web of Debt , and I 
still found it to be an eye-opener, a remarkable window into what is 
really going on. 

The process by which money comes into existence is thoroughly 
misunderstood, and for good reason: it has been the focus of a highly 
sophisticated and long-term disinformation campaign that permeates 
academia, media, and publishing. The complexity of the subject has 
been intentionally exploited to keep its mysteries hidden. Henry Ford 
said it best: "It is well that the people of the nation do not understand our 
banking and monetary system, for if they did, I believe there would be a 
revolution before tomorrow morning." 

In banking schools and universities, I was drilled in the technology 
of money and banking, clearing houses, the Federal Reserve System, 
money creation through the multiplier effect, and the peculiar role of 
the commercial banker as the guardian of the public treasure. This 
idealized vision contrasted sharply with what I saw as I worked in 
the U.S. banking sector. Although there are many financially sound 
banks that follow the highest ethical standards, corruption is also 
rampant that flies in the face of the stated ethical objectives of the 
American Bankers Association and the guidelines of the FDIC, the 
Comptroller of the Currency, and other regulators. This tendency is 
particularly evident in the large money center banks, in one of which 
I worked. 


In my experience, in fact, the chief source of bank robbery is not 
masked men looting tellers' cash tills but the blatant abuse of the 
extension of credit by white collar criminals. A common practice is 
for loan officers to ignore the long-term risk of loans and approve 
those loan transactions with the highest fees and interest paid 
immediately - income which can be distributed to the principal 
executives of the bank. Such distribution is buried within the bank's 
owner /manager compensation and is distributed to the principal 
owners as dividends and stock options. That helps explain why, in 
my home state of Kansas, a major bank in Topeka was run into 
bankruptcy after its chairman entered into a development and 
construction loan involving a mortgaged 5,000 acre residential 
development tract in the "exurbs" far outside of Houston, Texas. The 
development included curbs, gutters, pavement, street lighting, water, 
sewer, electricity - everything but homes and families! If the loan had 
been metered out in small phases to match market absorption, the 
chairman of that once-fine institution would not have been able to 
disburse to himself and his friends the enormous up-front loan fees 
and interest owing to that specific transaction, or to the many loans 
he made just like it. During the 1980s, developers from across the 
country beat a path to sleepy Topeka and other areas sporting similar 
financial institutions, just to have a chance to dance with these corrupt 
lenders. The managers and developers got rich, leaving the banks' 
shareholders and the taxpayers to pay the bill. 

These are just individual instances of corruption, but they indicate 
a mind-set to exploit and a system that can be exploited. Ellen Brown's 
book focuses on a more fundamental fraud in the banking system - 
the creation and control of money itself by private bankers, in a debt- 
money system that returns a steady profit in the form of interest to the 
debt-money producers, saddling the nation with a growing mountain 
of unnecessary and impossible-to-repay debt. The fact that money 
creation is nearly everywhere a private affair is largely unknown today, 
but the issue is not new. The control of the money system by private 
interests was known to many of our earlier leaders, as shown in a 
number of quotes reprinted in this book, including these: 

The real truth of the matter is, as you and I know, that a financial 
element in the large centers has owned the Government ever since the 
days of Andrew Jackson. 

— President Franklin Delano Roosevelt, November 23, 1933, 
in a letter to Colonel Edward Mandell House 


Some people think the Federal Reserve Banks are U.S. government 
institutions. They are not . . . they are private credit monopolies 
which prey upon the people of the U.S. for the benefit of themselves 
and their foreign and domestic swindlers, and rich and predatory 
money lenders. The sack of the United States by the Fed is the greatest 
crime in history. Every effort has been made by the Fed to conceal its 
powers, but the truth is the Fed has usurped the government. It 
controls everything here and it controls all our foreign relations. It 
makes and breaks governments at will. 

— Congressman Charles McFadden, Chairman, House 
Banking and Currency Committee, June 10, 1932 

Web of Debt gives a blow by blow account of how a network of 
private bankers has taken over the creation and control of the 
international money system and what they are doing with that control. 
Credible evidence is presented of a world power elite intent on gaining 
absolute control over the planet and its natural resources, including 
its subservient "human resources" or "human capital." The lifeblood 
of this power elite is money, and its weapon is fear. The whole of 
civilization and all of its systems hang on this fulcrum of the money 
power. In private hands, where it is now, it can be used to enslave 
nations and ensure perpetual wars and bondage. Internationally, the 
banksters and their governmental partners use these fraudulent 
economic tools to weaken or defeat opponents without a shot being 
fired. Witness the recent East Asian financial crisis of 1997 and the 
Russian ruble collapse of 1998. Economic means have long been used 
to spark wars, as a pretext and prelude for the money power to stock 
and restock the armaments and infrastructure of both sides. 

Brown's book is thus about more than just monetary theory and 
reform. By exposing the present unsustainable situation, it is a first 
step toward loosening the malign grip on the world held by a very 
small but powerful financial faction. The book can serve to spark an 
open dialogue concerning the most important topic of our monetary 
system, one that is practically off limits today in conventional economic 
circles due to intimidation and fear of the consequences an honest 
discourse might bring. Brown is not afraid of stepping on the black 
patent leather wingtips of the money power and their academic 
economist servants. Her book is a raised clenched fist of defiance and 
truth smashing through their finely spun web of disinformation, 
distortion, deceit, and boldfaced lies concerning money, banking, and 

economics. It exposes the covert financial enemy that has gotten inside 
the gates of our Troy, making it our first line of defense against the 
unrestricted asymmetrical warfare which is presently directed against 
the people of America and the world. 

This book not only exposes the problem but outlines a sound solution 
for the ever-increasing debt and other monetary woes of the nation 
and the world. It shows that ending the debt-money fractional reserve 
banking system and returning to an honest debt-free monetary system 
could provide Americans with a future that is prosperous beyond our 
imagining. An editorial directed against Lincoln's debt-free 
Greenbacks, attributed to The London Times, said it all: 

If that mischievous financial policy which had its origin in the North 
American Republic during the late war in that country, should become 
indurated down to a fixture, then that Government will furnish its 
own money without cost. It will pay off its debts and be without debt. 
It will become prosperous beyond precedent in the history of the 
civilized governments of the world. The brains and wealth of all 
countries will go to North America. That government must be 
destroyed or it will destroy every monarchy on the globe. 

- REED SIMPSON, M.Sc, Overland Park, Kansas 

American Bankers Association Graduate School of Banking 
London School of Economics, Graduate School of Economics 
University of Kansas Graduate School of Architecture 

- November 2006 



Through a network of anonymous financial spider webbing only a 
handful of global King Bankers own and control it all. . . . Everybody, 
people, enterprise, State and foreign countries, all have become slaves 
chained to the Banker's credit ropes. 

— Hans Schicht, "The Death of Banking" (February 2005) 1 

President Andrew Jackson called the banking cartel "a hydra- 
headed monster eating the flesh of the common man." New 
York Mayor John Hylan, writing in the 1920s, called it a "giant octopus" 
that "seizes in its long and powerful tentacles our executive officers, 
our legislative bodies, our schools, our courts, our newspapers, and 
every agency created for the public protection." The debt spider has 
devoured farms, homes and whole countries that have become trapped 
in its web. 

In "The Death of Banking," financial commentator Hans Schicht 
states that he had an opportunity in his career to observe the wizards 
of finance as an insider at close range. Their game, he says, has gotten 
so centralized and concentrated that the greater part of U.S. banking 
and enterprise is now under the control of a small inner circle of men. 
He calls the game "spider webbing." Its rules include: 

• Making any concentration of wealth invisible. 

• Exercising control through "leverage" - mergers, takeovers, chain 
share holdings where one company holds shares of other 
companies, conditions annexed to loans, and so forth. 

• Exercising tight personal management and control, with a 
minimum of insiders and front-men who themselves have only 
partial knowledge of the game. 

Dr. Carroll Quigley was a writer and professor of history at 
Georgetown University, where he was President Bill Clinton's mentor. 



Professor Quigley wrote from personal knowledge of an elite clique of 
global financiers bent on controlling the world. Their aim, he said, 
was "nothing less than to create a world system of financial control 
in private hands able to dominate the political system of each country 
and the economy of the world as a whole." This system was "to be 
controlled in a feudalist fashion by the central banks of the world 
acting in concert, by secret agreements." 2 He called this clique simply 
the "international bankers." Their essence was not race, religion or 
nationality but was just a passion for control over other humans. The 
key to their success was that they would control and manipulate the money 
system of a nation while letting it appear to be controlled by the government. 

The international bankers have succeeded in doing more than just 
controlling the money supply. Today they actually create the money 
supply, while making it appear to be created by the government. This 
devious scheme was revealed by Sir Josiah Stamp, director of the Bank 
of England and the second richest man in Britain in the 1920s. Speak- 
ing at the University of Texas in 1927, he dropped this bombshell: 

The modern banking system manufactures money out of nothing. 
The process is perhaps the most astounding piece of sleight of 
hand that was ever invented. Banking was conceived in inequity 
and born in sin .... Bankers own the earth. Take it away from 
them but leave them the power to create money, and, with a 
flick of a pen, they will create enough money to buy it back 
again. . . . Take this great power away from them and all great 
fortunes like mine will disappear, for then this would be a better 
and happier world to live in. . . . But, if you want to continue to be 
the slaves of bankers and pay the cost of your own slavery, then let 
bankers continue to create money and control credit? 

Professor Henry C. K. Liu is an economist who graduated from 
Harvard and chaired a graduate department at UCLA before becom- 
ing an investment adviser for developing countries. He calls the cur- 
rent monetary scheme a "cruel hoax." When we wake up to that fact, 
he says, our entire economic world view will need to be reordered, 
"just as physics was subject to reordering when man's world view 
changed with the realization that the earth is not stationary nor is it 
the center of the universe." 4 The hoax is that there is virtually no 
"real" money in the system, only debts. Except for coins, which are 
issued by the government and make up only about one one-thousandth 
of the money supply, the entire U.S. money supply now consists of debt to 
private banks, for money they created with accounting entries on their books. 


Web of Debt 

It is all done by sleight of hand; and like a magician's trick, we have to 
see it many times before we realize what is going on. But when we 
do, it changes everything. All of history has to be rewritten. 

The following chapters track the web of deceit that has engulfed 
us in debt, and present a simple solution that could make the country 
solvent once again. It is not a new solution but dates back to the 
Constitution: the power to create money needs to be returned to the 
government and the people it represents. The federal debt could be 
paid, income taxes could be eliminated, and social programs could be 
expanded; and this could all be done without imposing austerity 
measures on the people or sparking runaway inflation. Utopian as 
that may sound, it represents the thinking of some of America's brightest 
and best, historical and contemporary, including Abraham Lincoln, 
Thomas Jefferson and Benjamin Franklin. Among other arresting facts 
explored in this book are that: 

• The "Federal" Reserve is not actually federal. It is a private 
corporation owned by a consortium of very large multinational 
banks. (Chapter 13.) 

• Except for coins, the government does not create money. Dollar 
bills (Federal Reserve Notes) are created by the private Federal 
Reserve, which lends them to the government. (Chapter 2.) 

• Tangible currency (coins and dollar bills) together make up less 
than 3 percent of the U.S. money supply. The other 97 percent 
exists only as data entries on computer screens, and all of this money 
was created by banks in the form of loans. (Chapters 2 and 17.) 

• The money that banks lend is not recycled from pre-existing 
deposits. It is new money, which did not exist until it was lent. 
(Chapters 17 and 18.) 

• Thirty percent of the money created by banks with accounting 
entries is invested for their own accounts. (Chapter 18.) 

• The American banking system, which at one time extended 
productive loans to agriculture and industry, has today become a 
giant betting machine. By December 2007, an estimated $682 trillion 
were riding on complex high-risk bets known as derivatives — 10 
times the annual output of the entire world economy. These bets 
are funded by big U.S. banks and are made largely with borrowed 
money created on a computer screen. Derivatives can be and have 
been used to manipulate markets, loot businesses, and destroy 
competitor economies. (Chapters 20 and 32.) 



• The U.S. federal debt has not been paid off since the days of Andrew 
Jackson. Only the interest gets paid, while the principal portion 
continues to grow. (Chapter 2.) 

• The federal income tax was instituted specifically to coerce 
taxpayers to pay the interest due to the banks on the federal debt. 
If the money supply had been created by the government rather 
than borrowed from banks that created it, the income tax would 
have been unnecessary. (Chapters 13 and 43.) 

• The interest alone on the federal debt will soon be more than the 
taxpayers can afford to pay. When we can't pay, the Federal 
Reserve's debt-based dollar system will collapse. (Chapter 29.) 

• Contrary to popular belief, creeping inflation is not caused by the 
government irresponsibly printing dollars. It is caused by banks 
expanding the money supply with loans. (Chapter 10.) 

• Most of the runaway inflation seen in "banana republics" has been 
caused, not by national governments over-printing money, but by 
global institutional speculators attacking local currencies and 
devaluing them on international markets. (Chapter 25.) 

• The same sort of speculative devaluation could happen to the U.S. 
dollar if international investors were to abandon it as a global 
"reserve" currency, something they are now threatening to do in 
retaliation for what they perceive to be American economic 
imperialism. (Chapters 29 and 37.) 

• There is a way out of this morass. The early American colonists 
found it, and so did Abraham Lincoln and some other national 
leaders: the government can take back the money-issuing power 
from the banks. (Chapters 8 and 24.) 

The bankers' Federal Reserve Notes and the government's coins 
represent two separate money systems that have been competing for 
dominance throughout recorded history. At one time, the right to 
issue money was the sovereign right of the king; but that right got 
usurped by private moneylenders. Today the sovereigns are the people, 
and the coins that make up less than one one-thousandth of the money 
supply are all that are left of our sovereign money. Many nations 
have successfully issued their own money, at least for a time; but the 
bankers' debt-money has generally infiltrated the system and taken 
over in the end. These concepts are so foreign to what we have been 
taught that it can be hard to wrap our minds around them, but the 
facts have been substantiated by many reliable authorities. To cite a 
few - 


Web of Debt 

Robert H. Hemphill, Credit Manager of the Federal Reserve Bank 
of Atlanta, wrote in 1934: 

We are completely dependent on the commercial Banks. Someone 
has to borrow every dollar we have in circulation, cash or credit. If 
the Banks create ample synthetic money we are prosperous; if 
not, we starve. We are absolutely without a permanent money 
system. When one gets a complete grasp of the picture, the tragic 
absurdity of our hopeless position is almost incredible, but there 
it is. It is the most important subject intelligent persons can 
investigate and reflect upon. 5 

Graham Towers, Governor of the Bank of Canada from 1935 to 
1955, acknowledged: 

Banks create money. That is what they are for. . . . The 
manufacturing process to make money consists of making an 
entry in a book. That is all. . . . Each and every time a Bank makes 
a loan . . . new Bank credit is created — brand new money. 6 

Robert B. Anderson, Secretary of the Treasury under Eisenhower, 
said in an interview reported in the August 31, 1959 issue of U.S. 
News and World Report : 

[W]hen a bank makes a loan, it simply adds to the borrower's 
deposit account in the bank by the amount of the loan. The 

money is not taken from anyone else's deposit; it was not previously 
paid in to the bank by anyone. It's new money, created by the bank 
for the use of the borrower. 

Michel Chossudovsky, Professor of Economics at the University of 
Ottawa, wrote during the Asian currency crisis of 1998: 

[P]rivately held money reserves in the hands of "institutional 
speculators" far exceed the limited capabilities of the World's 
central banks. The latter acting individually or collectively are 
no longer able to fight the tide of speculative activity. Monetary 
policy is in the hands of private creditors who have the ability to 
freeze State budgets, paralyse the payments process, thwart the regular 
disbursement of wages to millions of workers (as in the former Soviet 
Union) and precipitate the collapse of production and social 
programmes. 7 

Today, Federal Reserve Notes and U.S. dollar loans dominate the 
economy of the world; but this international currency is not money 
issued by the American people or their government. It is money created 
and lent by a private cartel of international bankers, and this cartel 



has the United States itself hopelessly entangled in a web of debt. By 
2006, combined personal, corporate and federal debt in the United 
States had reached a staggering 44 trillion dollars - four times the 
collective national income, or $147,312 for every man, woman and 
child in the country. 8 The United States is legally bankrupt, defined in 
the dictionary as being unable to pay one's debts, being insolvent, or 
having liabilities in excess of a reasonable market value of assets held. 
By October 2006, the debt of the U.S. government had hit a breath- 
taking $8.5 trillion. Local, state and national governments are all so 
heavily in debt that they have been forced to sell off public assets to 
satisfy creditors. Crowded schools, crowded roads, and cutbacks in 
public transportation are eroding the quality of American life. A 2005 
report by the American Society of Civil Engineers gave the nation's 
infrastructure an overall grade of D, including its roads, bridges, 
drinking water systems and other public works. "Americans are 
spending more time stuck in traffic and less time at home with their 
families," said the group's president. "We need to establish a 
comprehensive, long-term infrastructure plan." 9 We need to but we 
can't, because government at every level is broke. 

If governments everywhere are in debt, who are they in debt to? 
The answer is that they are in debt to private banks. The "cruel hoax" 
is that governments are in debt for money created on a computer 
screen, money they could have created themselves. 

Money in the Land of Oz 

The vast power acquired through this sleight of hand by a small 
clique of men pulling the strings of government behind the scenes evokes 
images from The Wizard of Oz, a classic American fairytale that has 
become a rich source of imagery for financial commentators. In a 
2002 article titled "Who Controls the Federal Reserve System?", Victor 
Thorn wrote: 

In essence, money has become nothing more than illusion — an 
electronic figure or amount on a computer screen. ... As time 
goes on, we have an increasing tendency toward being sucked 
into this Wizard of Oz vortex of unreality [by] magician-priests 
that use the illusion of money as their control device. 12 

Christopher Mark wrote in a series called "The Grand Deception": 

Welcome to the world of the International Banker, who like the 
famous film, The Wizard of Oz, stands behind the curtain of 


Web of Debt 

orchestrated national and international policymakers and so- 
called elected leaders. 10 

The late Murray Rothbard, an economist of the classical Austrian 
School, wrote: 

Money and banking have been made to appear as mysterious 
and arcane processes that must be guided and operated by a 
technocratic elite. They are nothing of the sort. In money, even 
more than the rest of our affairs, we have been tricked by a 
malignant Wizard of Oz. 11 

James Galbraith wrote in The New American Prospect : 

We are left . . . with the thought that the Federal Reserve Board 
does not know what it is doing. This is the "Wizard of Oz" 
theory, in which we pull away the curtains only to find an old 
man with a wrinkled face, playing with lights and loudspeakers. 13 

The analogies to The Wizard of Oz work for a reason. According 
to later commentators, the tale was actually written as a monetary 
allegory, at a time when the "money question" was a key issue in 
American politics. In the 1890s, politicians were still hotly debating 
who should create the nation's money and what it should consist of. 
Should it be created by the government, with full accountability to the 
people? Or should it be created by private banks behind closed doors, 
for the banks' own private ends? 

William Jennings Bryan, the Populist candidate for President in 
1896 and again in 1900, mounted the last serious challenge to the 
right of private bankers to create the national money supply. According 
to the commentators, Bryan was represented in Frank Baum's 1900 
book The Wonderful Wizard of Oz by the Cowardly Lion. The Lion 
finally proved he was the King of Beasts by decapitating a giant spider 
that was terrorizing everyone in the forest. The giant spider Bryan 
challenged at the turn of the twentieth century was the Morgan/ 
Rockefeller banking cartel, which was bent on usurping the power to 
create money from the people and their representative government. 

Before World War I, two opposing systems of political economy 
competed for dominance in the United States. One operated out of 
Wall Street, the New York financial district that came to be the symbol 
of American finance. Its most important address was 23 Wall Street, 
known as the "House of Morgan." J. P. Morgan was an agent of 
powerful British banking interests. The Wizards of Wall Street and 
the Old World bankers pulling their strings sought to establish a national 



currency that was based on the "gold standard," one created privately 
by the financial elite who controlled the gold. The other system dated 
back to Benjamin Franklin and operated out of Philadelphia, the 
country's first capital, where the Constitutional Convention was held 
and Franklin's "Society for Political Inquiries" planned the 
industrialization and public works that would free the new republic 
from economic slavery to England. 14 The Philadelphia faction favored 
a bank on the model established in provincial Pennsylvania, where a 
state loan office issued and lent money, collected the interest, and 
returned it to the provincial government to be used in place of taxes. 
President Abraham Lincoln returned to the colonial system of 
government-issued money during the Civil War; but he was 
assassinated, and the bankers reclaimed control of the money machine. 
The silent coup of the Wall Street faction culminated with the passage 
of the Federal Reserve Act in 1913, something they achieved by 
misleading Bryan and other wary Congressmen into thinking the 
Federal Reserve was actually federal. 

Today the debate over who should create the national money 
supply is rarely heard, mainly because few people even realize it is an 
issue. Politicians and economists, along with everybody else, simply 
assume that money is created by the government, and that the 
"inflation" everybody complains about is caused by an out-of-control 
government running the dollar printing presses. The puppeteers 
working the money machine were more visible in the 1890s than they 
are today, largely because they had not yet succeeded in buying up 
the media and cornering public opinion. 

Economics is a dry and forbidding subject that has been made 
intentionally complex by banking interests intent on concealing what 
is really going on. It is a subject that sorely needs lightening up, with 
imagery, metaphors, characters and a plot; so before we get into the 
ponderous details of the modern system of money-based-on-debt, we'll 
take an excursion back to a simpler time, when the money issues were 
more obvious and were still a burning topic of discussion. The plot 
line for The Wizard of Oz has been traced to the first-ever march on 
Washington, led by an obscure Ohio businessman who sought to 
persuade Congress to return to Lincoln's system of government-issued 
money in 1894. Besides sparking a century of protest marches and 
the country's most famous fairytale, this little-known visionary and 
the band of unemployed men he led may actually have had the solution 
to the whole money problem, then and now .... 


Section I 



"Did you bring your broomstick?" 
"No, I'm afraid I didn't." 

"Then you'll have to walk. . . . It's always best to start at 
the beginning . . . all you do is follow the Yellow Brick Road. ' 

- The Wizard of Oz (1939 film) 

Chapter 1 

"The great Oz has spoken! Pay no attention to that man 
behind the curtain! I am the great and powerful Wizard of Oz!" 

Tn refreshing contrast to the impenetrable writings of econo- 
-Lmists, the classic fairytale The Wizard of Oz has delighted young 
and old for over a century. It was first published by L. Frank Baum as 
The Wonderful Wizard of Oz in 1900. In 1939, it was made into a hit 
Hollywood movie starring Judy Garland, and later it was made into 
the popular stage play The Wiz . Few of the millions who have en- 
joyed this charming tale have suspected that its imagery was drawn 
from that most obscure and tedious of subjects, banking and finance. 
Fewer still have suspected that the real-life folk heroes who inspired 
its plot may actually have had the answer to the financial crisis facing 
the country today! 

The economic allusions in Baum's tale were first observed in 1964 
by a schoolteacher named Henry Littlefield, who called the story "a 
parable on Populism," referring to the People's Party movement chal- 
lenging the banking monopoly in the late nineteenth century. 1 Other 
analysts later picked up the theme. Economist Hugh Rockoff, writing 
in the Tournal of Political Economy in 1990, called the tale a "mon- 
etary allegory." 2 Professor Tim Ziaukas, writing in 1998, stated: 

"The Wizard of Oz" . . . was written at a time when American 
society was consumed by the debate over the "financial 
question," that is, the creation and circulation of money. . . . The 
characters of "The Wizard of Oz" represented those deeply 
involved in the debate: the Scarecrow as the farmers, the Tin 
Woodman as the industrial workers, the Lion as silver advocate 
William Jennings Bryan and Dorothy as the archetypal American 
girl. 3 


Chapter 1 - Lessons from the Wizard of Oz 

The Wizard of Oz has been called "the first truly American 
fairytale." 4 The Germans established the national fairytale tradition 
with Grimm's Fairy Tales, a collection of popular folklore gathered by 
the Brothers Grimm specifically to reflect German populist traditions 
and national values. 5 Baum's book did the same thing for the American 
populist (or people's) tradition. It was all about people power, 
manifesting your dreams, finding what you wanted in your own 
backyard. According to Littlefield, the march of Dorothy and her 
friends to the Emerald City to petition the Wizard of Oz for help was 
patterned after the 1894 march from Ohio to Washington of an 
"Industrial Army" led by Jacob Coxey, urging Congress to return to 
the system of debt-free government-issued Grenbacks initiated by 
Abraham Lincoln. The march of Coxey' s Army on Washington began 
a long tradition of people taking to the streets in peaceful protest when 
there seemed no other way to voice their appeals. As Lawrence 
Goodwin, author of The Populist Moment, described the nineteenth 
century movement to change the money system: 

[T]here was once a time in history when people acted. . . . 
[F]armers were trapped in debt. They were the most oppressed 
of Americans, they experimented with cooperative purchasing 
and marketing, they tried to find their own way out of the strangle 
hold of debt to merchants, but none of this could work if they 
couldn't get capital. So they had to turn to politics, and they 

had to organize themselves into a party [T]he populists didn't 

just organize a political party, they made a movement. They 
had picnics and parties and newsletters and classes and courses, 
and they taught themselves, and they taught each other, and 
they became a group of people with a sense of purpose, a group 
of people with courage, a group of people with dignity. 6 

Like the Populists, Dorothy and her troop discovered that they 
had the power to solve their own problems and achieve their own 
dreams. The Scarecrow in search of a brain, the Tin Man in search of 
a heart, the Lion in search of courage actually had what they wanted 
all along. When the Wizard's false magic proved powerless, the Wicked 
Witch was vanquished by a defenseless young girl and her little dog. 
When the Wizard disappeared in his hot air balloon, the unlettered 
Scarecrow took over as leader of Oz. 

The Wizard of Oz came to embody the American dream and the 
American national spirit. In the United States, the land of abundance, 
all you had to do was to realize your potential and manifest it. That 


Web of Debt 

was one of the tale's morals, but it also contained a darker one, a 
message for which its imagery has become a familiar metaphor: that 
there are invisible puppeteers pulling the strings of the puppets we see 
on the stage, in a show that is largely illusion. 

The March on Washington 
That Inspired the March on Oz 

The 1890s were plagued by an economic depression that was nearly 
as severe as the Great Depression of the 1930s. The farmers lived like 
serfs to the bankers, having mortgaged their farms, their equipment, 
and sometimes even the seeds they needed for planting. They were 
charged so much by a railroad cartel for shipping their products to 
market that they could have more costs and debts than profits. The 
farmers were as ignorant as the Scarecrow of banking policies; while 
in the cities, unemployed factory workers were as frozen as the Tin 
Woodman, from the lack of a free-flowing supply of money to "oil" 
the wheels of industry. In the early 1890s, unemployment had reached 
20 percent. The crime rate soared, families were torn apart, racial 
tensions boiled. The nation was in chaos. Radical party politics thrived. 

In every presidential election between 1872 and 1896, there was a 
third national party running on a platform of financial reform. Typi- 
cally organized under the auspices of labor or farmer organizations, 
these were parties of the people rather than the banks. They included 
the Populist Party, the Greenback and Greenback Labor Parties, the 
Labor Reform Party, the Antimonopolist Party, and the Union Labor 
Party. They advocated expanding the national currency to meet the 
needs of trade, reform of the banking system, and democratic control 
of the financial system. 7 

Money reform advocates today tend to argue that the solution to 
the country's financial woes is to return to the "gold standard," which 
required that paper money be backed by a certain weight of gold bul- 
lion. But to the farmers and laborers who were suffering under its 
yoke in the 1890s, the gold standard was the problem. They had been 
there and knew it didn't work. William Jennings Bryan called the 
bankers' private gold-based money a "cross of gold." There was sim- 
ply not enough gold available to finance the needs of an expanding 
economy. The bankers made loans in notes backed by gold and re- 
quired repayment in notes backed by gold; but the bankers controlled 
the gold, and its price was subject to manipulation by speculators. 


Chapter 1 - Lessons from the Wizard of Oz 

Gold's price had increased over the course of the century, while the 
prices laborers got for their wares had dropped. People short of gold 
had to borrow from the bankers, who periodically contracted the money 
supply by calling in loans and raising interest rates. The result was 
"tight" money - insufficient money to go around. Like in a game of 
musical chairs, the people who came up short wound up losing their 
homes to the banks. 

The solution of Jacob Coxey and his Industrial Army of destitute 
unemployed men was to augment the money supply with government- 
issued United States Notes. Popularly called "Greenbacks," these 
federal dollars were first issued by President Lincoln when he was 
faced with usurious interest rates in the 1860s. Lincoln had foiled the 
bankers by making up the budget shortfall with U.S. Notes that did 
not accrue interest and did not have to be paid back to the banks. The 
same sort of debt-free paper money had financed a long period of 
colonial abundance in the eighteenth century, until King George forbade 
the colonies from issuing their own currency. The money supply had 
then shrunk, precipitating a depression that led to the American 

To remedy the tight-money problem that resulted when the 
Greenbacks were halted after Lincoln's assassination, Coxey proposed 
that Congress should increase the money supply with a further $500 
million in Greenbacks. This new money would be used to redeem the 
federal debt and to stimulate the economy by putting the unemployed 
to work on public projects. 8 The bankers countered that allowing the 
government to issue money would be dangerously inflationary. What 
they failed to reveal was that their own paper banknotes were 
themselves highly inflationary, since the same gold was "lent" many 
times over, effectively counterfeiting it; and when the bankers lent 
their paper money to the government, the government wound up 
heavily in debt for something it could have created itself. But those 
facts were buried in confusing rhetoric, and the bankers' "gold 
standard" won the day. 


Web of Debt 

The Silver Slippers: The Populist Solution 
to the Money Question 

The Greenback Party was later absorbed into the Populist Party, 
which took up the cause against tight money in the 1890s. Like the 
Greenbackers, the Populists argued that money should be issued by 
the government rather than by private banks. William Jennings Bryan, 
the Populists' loquacious leader, gave such a stirring speech at the 
Democratic convention that he won the Democratic nomination for 
President in 1896. Outgoing President Grover Cleveland was also a 
Democrat, but he was an agent of J. P. Morgan and the Wall Street 
banking interests. Cleveland favored money that was issued by the 
banks, and he backed the bankers' gold standard. Bryan was op- 
posed to both. He argued in his winning nomination speech: 

We say in our platform that we believe that the right to coin 
money and issue money is a function of government. . . . Those who 
are opposed to this proposition tell us that the issue of paper 
money is a function of the bank and that the government ought 
to go out of the banking business. I stand with Jefferson . . . and 
tell them, as he did, that the issue of money is a function of the 
government and that the banks should go out of the governing business. 
. . . [W]hen we have restored the money of the Constitution, all 
other necessary reforms will be possible, and . . . until that is 
done there is no reform that can be accomplished. 

He concluded with these famous lines: 

You shall not press down upon the brow of labor this crown of 
thorns, you shall not crucify mankind upon a cross of gold. 9 

Since the Greenbackers' push for government-issued paper money 
had failed, Bryan and the "Silverites" proposed solving the liquidity 
problem in another way. The money supply could be supplemented 
with coins made of silver, a precious metal that was cheaper and more 
readily available than gold. Silver was considered to be "the money of 
the Constitution." The Constitution referred only to the "dollar," but 
the dollar was understood to be a reference to the Spanish milled silver 
dollar coin then in common use. The slogan of the Silverites was "16 
to 1": 16 ounces of silver would be the monetary equivalent of 1 ounce 
of gold. Ounces is abbreviated oz, hence "Oz." The Wizard of the 
Gold Ounce (Oz) in Washington was identified by later commentators 
as Marcus Hanna, the power behind the Republican Party, who 


Chapter 1 - Lessons from the Wizard of Oz 

controlled the mechanisms of finance in the administration of President 
William McKinley. 10 (Karl Rove, political adviser to President George 
Bush Jr., reportedly took Hanna for a role model. 11 ) 

Frank Baum, the journalist who turned the politics of his day into 
The Wonderful Wizard of Oz, marched with the Populist Party in 
support of Bryan in 1896. Baum is said to have had a deep distrust of 
big-city financiers; but when his dry goods business failed, he bought 
a Republican newspaper, which had to have a Republican message to 
retain its readership. 12 That may have been why the Populist message 
was so deeply buried in symbolism in his famous fairytale. Like Lewis 
Carroll, who began his career writing uninspiring tracts about 
mathematics and politics and wound up satirizing Victorian society 
in Alice's Adventures in Wonderland, Baum was able to suggest in a 
children's story what he could not say in his editorials. His book 
contained many subtle allusions to the political and financial issues of 
the day. The story's inspirational message was a product of the times 
as well. Commentators trace it to the theosophical movement, another 
popular trend of which Baum was an active member. 13 Newly- 
imported from India, it held that reality is a construct of the mind. 
What you want is already yours; you need only to believe it, to "realize" 
it or "make it real." 

Looking at the plot of this familiar fairytale, then, through the lens 
of the contemporary movements that inspired it ... . 

An Allegory of Money, Politics 
and Believing in Yourself 

The story begins on a barren Kansas farm, where Dorothy lives 
with a very sober aunt and uncle who "never laughed" (the 1890s 
depression that hit the farmers particularly hard). A cyclone comes 
up, carrying Dorothy and the farmhouse into the magical world of 
Oz (the American dream that might have been). The house lands on 
the Wicked Witch of the East (the Wall Street bankers and their man 
Grover Cleveland), who has kept the Munchkins (the farmers and 
factory workers) in bondage for many years. 

For killing the Wicked Witch, Dorothy is awarded magic silver 
slippers (the Populist silver solution to the money crisis) by the Good 
Witch of the North (the North was then a Populist stronghold). In the 
1939 film, the silver slippers would be transformed into ruby slippers 
to show off the cinema's new technicolor abilities; but the monetary 


Web of Debt 

imagery Baum suggested was lost. The silver shoes had the magic 
power to solve Dorothy's dilemma, just as the Silverites thought that 
expanding the money supply with silver coins would solve the problems 
facing the farmers. 

Dorothy wanted to get back to Kansas but was unaware of the 
power of the slippers on her feet, so she set out to the Emerald City to 
seek help from the Wizard of Oz (the apparently all-powerful President, 
whose strings were actually pulled by financiers concealed behind a 

"The road to the City of Emeralds is paved with yellow brick," she 
was told, "so you cannot miss it." Baum's contemporary audience, 
wrote Professor Ziaukas, could not miss it either, as an allusion to the 
gold standard that was then a hot topic of debate. 14 Like the Emerald 
City and the Great and Powerful Oz himself, the yellow brick road 
would turn out to be an illusion. In the end, what would carry Dorothy 
home were silver slippers. 

On her journey down the yellow brick road, Dorothy was first 
joined by the Scarecrow in search of a brain (the naive but intelligent 
farmer kept in the dark about the government's financial policies), 
then by the Tin Woodman in search of a heart (the factory worker 
frozen by unemployment and dehumanized by mechanization). 
Littlefield commented: 

The Tin Woodman . . . had been put under a spell by the Witch 
of the East. Once an independent and hard working human 
being, the Woodman found that each time he swung his axe it 
chopped off a different part of his body. Knowing no other 
trade he "worked harder than ever," for luckily in Oz tinsmiths 
can repair such things. Soon the Woodman was all tin. In this 
way Eastern witchcraft dehumanized a simple laborer so that 
the faster and better he worked the more quickly he became a 
kind of machine. Here is a Populist view of evil Eastern 
influences on honest labor which could hardly be more pointed. 

The Eastern witchcraft that had caused the Woodman to chop off 
parts of his own body reflected the dark magic of the Wall Street bank- 
ers, whose "gold standard" allowed less money into the system than 
was collectively owed to the banks, causing the assets of the laboring 
classes to be systematically devoured by debt. 

The fourth petitioner to join the march on Oz was the Lion in 
search of courage. According to Littlefield, he represented the orator 
Bryan himself, whose roar was mighty like the king of the forest but 


Chapter 1 - Lessons from the Wizard of Oz 

who lacked political power. Bryan was branded a coward by his 
opponents, because he was a pacifist and anti-imperialist at a time of 
American expansion in Asia. The Lion became entranced and fell 
asleep in the Witch's poppy field, suggesting Bryan's tendency to get 
side-tracked with issues of American imperialism stemming from the 
Opium Wars. Since Bryan led the "Populist" or "People's" Party, the 
Lion also represented the people, collectively powerful but entranced 
and unaware of their strength. 

In the Emerald City, the people were required to wear green-colored 
glasses attached by a gold buckle, suggesting green paper money 
shackled to the gold standard. 

To get to her room in the Emerald Palace, Dorothy had to go 
through 7 passages and up 3 flights of stairs, an allusion to the "Crime 
of '73." The 1873 Act that changed the money system from bimetallism 
(paper notes backed by both gold and silver) to an exclusive gold 
standard was proof to all Populists that Congress and the bankers 
were in collusion. 15 

Dorothy and her troop presented their requests to the Wizard, 
who demanded that they first vanquish the Wicked Witch of the West, 
representing the McKinley/ Rockefeller faction in Ohio (then consid- 
ered a Western state). The financial powers of the day were the Mor- 
gan/Wall Street/ Cleveland faction in the East (the Wicked Witch of 
the East) and this Rockefeller-backed contingent from Ohio, the state 
of McKinley, Hanna, and Rockefeller's Standard Oil cartel. Hanna 
was an industrialist who was a high school friend of John D. Rockefeller 
and had the financial backing of the oil giant. 16 

Dorothy and her friends learned that the Witch of the West had 
enslaved the Yellow Winkies and the Winged Monkeys (an allusion to 
the Chinese immigrants working on the Union-Pacific railroad, the 
native Americans banished from the northern woods, and the Filipinos 
denied independence by McKinley). Dorothy destroyed the Witch by 
melting her with a bucket of water, suggesting the rain that would 
reverse the drought, as well as the financial liquidity that the Populist 
solution would bring to the land. As one nineteenth century 
commentator put it, "Money and debt are as opposite in nature as fire 
and water; money extinguishes debt as water extinguishes fire." 17 

When Dorothy and her troop got lost in the forest, she was told to 
call the Winged Monkeys by using a Golden Cap she had found in the 
Witch's cupboard. When the Winged Monkeys came, their leader 
explained that they were once a free and happy people; but they were 
now "three times the slaves of the owner of the Golden Cap, whosoever 


Web of Debt 

he may be" (the bankers and their gold standard). When the Golden 
Cap fell into the hands of the Wicked Witch of the West, the Witch 
made them enslave the Winkies and drive Oz himself from the Land 
of the West. 

Dorothy used the power of the Cap to have her band of pilgrims 
flown to the Emerald City, where they discovered that the "Wizard" 
was only a smoke and mirrors illusion operated by a little man behind 
a curtain. A dispossessed Nebraska man himself, he admitted to be- 
ing a "humbug" without real power. "One of my greatest fears was 
the Witches," he said, "for while I had no magical powers at all I soon 
found out that the Witches were really able to do wonderful things." 

If the Wizard and his puppet were Marcus Hanna and William 
McKinley, who were the Witches they feared? Behind the Wall Street 
bankers were powerful British financiers, who funded the Confeder- 
ates in the Civil War and had been trying to divide and conquer 
America economically for over a century. Patriotic Americans had 
regarded the British as the enemy ever since the American Revolu- 
tion. McKinley was a protectionist who favored high tariffs to keep 
these marauding British free-traders out. When he was assassinated 
in 1901, no conspiracy was proved; but some suspicious commenta- 
tors saw the invisible hand of British high finance at work. 18 

Although the Wizard lacked magical powers, he was a very good 
psychologist, who showed the petitioners that they had the power to 
solve their own problems and manifest their own dreams. The 
Scarecrow just needed a paper diploma to realize that he had a brain. 
For the Tin Woodman, it was a silk heart; for the Lion, an elixir for 
courage. The Wizard offered to take Dorothy back to Kansas in the 
hot air balloon in which he had arrived years earlier, but the balloon 
took off before she could get on board. 

Dorothy and her friends then set out to find Glinda the Good Witch 
of the South, who they were told could help Dorothy find her way 
home. On the way they faced various challenges, including a great 
spider that ate everything in its path and kept everyone unsafe as long 
as it was alive. The Lion (the Populist leader Bryan) welcomed this 
chance to test his new-found courage and prove he was indeed the 
King of Beasts. He decapitated the mighty spider with his paw, just 
as Bryan would have toppled the banking cartel if he had won the 

The group finally reached Glinda, who revealed that Dorothy too 
had the magic tokens she needed all along: the Silver Shoes on her feet 
would take her home. But first, said Glinda, Dorothy must give up 


Chapter 1 - Lessons from the Wizard of Oz 

the Golden Cap (the bankers' restrictive gold standard that had 
enslaved the people). 

The moral also worked for the nation itself. The economy was 
deep in depression, but the country's farmlands were still fertile and 
its factories were ready to roll. Its entranced people merely lacked the 
paper tokens called "money" that would facilitate production and 
trade. The people had been deluded into a belief in scarcity by defining 
their wealth in terms of a scarce commodity, gold. The country's true 
wealth consisted of its goods and services, its resources and the 
creativity of its people. Like the Tin Woodman in need of oil, all it 
needed was a monetary medium that would allow this wealth to flow 
freely, circulating from the government to the people and back again, 
without being perpetually siphoned off into the private coffers of the 

Sequel to Oz 

The Populists did not achieve their goals, but they did prove that a 
third party could influence national politics and generate legislation. 
Although Bryan the Lion failed to stop the bankers, Dorothy's proto- 
type Jacob Coxey was still on the march. In a plot twist that would be 
considered contrived if it were fiction, he reappeared on the scene in 
the 1930s to run against Franklin D. Roosevelt for President, at a time 
when the "money question" had again become a burning issue. In 
one five-year period, over 2,000 schemes for monetary reform were 
advanced. Needless to say, Coxey lost the election; but he claimed 
that his Greenback proposal was the model for the "New Deal," 
Roosevelt's plan for putting the unemployed to work on government 
projects to pull the country out of the Depression. The difference was 
that Coxey' s plan would have been funded with debt-free currency 
issued by the government, on Lincoln's Greenback model. Roosevelt 
funded the New Deal with borrowed money, indebting the country 
to a banking cartel that was surreptitiously creating the money out of 
thin air, just as the government itself would have been doing under 
Coxey's plan without accruing a crippling debt to the banks. 

After World War II, the money question faded into obscurity. 
Today, writes British economist Michael Rowbotham, "The surest way 
to ruin a promising career in economics, whether professional or 
academic, is to venture into the 'cranks and crackpots' world of 
suggestions for reform of the financial system." 19 Yet the claims of 


Web of Debt 

these cranks and crackpots have consistently proven to be correct. 
The U.S. debt burden has mushroomed out of control, until just the 
interest on the federal debt now threatens to be a greater tax burden 
than the taxpayers can afford. The gold standard precipitated the 
problem, but unbuckling the dollar from gold did not solve it. Rather, 
it caused worse financial ills. Expanding the money supply with 
increasing amounts of "easy" bank credit just put increasing amounts 
of money in the bankers' pockets, while consumers sank further into 
debt. The problem has proven to be something more fundamental: it 
is in who extends the nation's credit. As long as the money supply is 
created as a debt owed back to private banks with interest, the nation's 
wealth will continue to be drained off into private vaults, leaving 
scarcity in its wake. 

Today's monetary allegory goes something like this: the dollar is a 
national resource that belongs to the people. It was an original inven- 
tion of the early American colonists, a new form of paper currency 
backed by the "full faith and credit" of the people. But a private bank- 
ing cartel has taken over its issuance, turning debt into money and 
demanding that it be paid back with interest. Taxes and a crushing 
federal debt have been imposed by a financial ruling class that keeps 
the people entranced and enslaved. In the happy storybook ending, 
the power to create money is returned to the people and abundance 
returns to the land. But before we get there, the Yellow Brick Road 
takes us through the twists and turns of history and the writings and 
insights of a wealth of key players. We're off to see the Wizard .... 


Chapter 2 

"Orders are — nobody can see the Great Oz! Not nobody - not 
nohow! . . . He's in conference with himself on account of this trouble 
with the Witch. And even if he wasn't you wouldn't have been able 
to see him anyway on account of nobody has - not even us in the 

- The Wizard of Oz (1939 film), 
"The Guardian of the Gates" 

The Federal Reserve did not yet exist when Frank Baum 
wrote The Wonderful Wizard of Oz, but the book's image of 
an all-too-human wizard acting behind a curtain of secrecy has been 
a favorite metaphor for the Fed's illustrious Chairman, who has been 
called the world's most powerful banker. Unlike the U.S. President, 
who must worry about re-election every four years and can serve only 
two terms, the head of the Fed can be reappointed indefinitely and 
answers to no one. Alan Greenspan served for more than eighteen 
years under four Presidents before he retired. In a 2001 article titled 
"Greenspan: Financial Wizard of Oz," journalist Paul Sperry wrote of 
that long-standing Chairman: 

You may think that congress - and therefore the people - can 
control him. But all lawmakers can do is call him to testify 
periodically .... The hearings are an exercise in futility, not 
accountability, because Greenspan just obfuscates till everyone 
is bored silly. You may think that the press can pin him down. 
In fact, we have no access to him. No press conferences or 


Chapter 2 - Behind the Curtain 

interviews are allowed. The high priest is untouchable in his 
marble temple here on Constitution Avenue. 1 

Sperry quoted another Fed-watcher, who remarked: 

Here's this guy, projecting this huge brain, and everyone's in 
awe of him. But pull back the curtain and there's just this little 
man frantically pulling at levers to maintain the image of an 
intellectual giant. 2 

Why is it necessary for the Federal Reserve to act behind a curtain 
of secrecy, independent of congressional oversight and control? Sup- 
posedly it is so the Fed can take actions that are in the best interests of 
the economy although they might be unpopular with voters. But as 
Wright Patman, Chairman of the House Banking and Currency Com- 
mittee, pointed out in the 1960s, Congress makes decisions every day 
that are unpopular, including raising taxes, cutting programs, and 
increasing expenditures; yet it does so after open debate, in the demo- 
cratic way. Why can't the Fed's Chairman, who doesn't even have to 
worry about re-election, lay his cards on the table in the same way? 
The Wizard of Oz could no doubt have answered that question: the 
whole money game is sleight of hand, and it depends on deception to 

A Game of Smoke and Mirrors 

Illusion surrounding the Federal Reserve begins with its name. The 
Federal Reserve is not actually federal, and it keeps no reserves — at 
least, not in the sense most people think. No gold or silver backs its 
Federal Reserve notes (our dollar bills). A booklet published by the 
Federal Reserve Bank of New York states: 

Currency cannot be redeemed, or exchanged, for Treasury gold 
or any other asset used as backing. The question of just what 
assets "back" Federal Reserve notes has little but bookkeeping 
significance. 3 

The Federal Reserve is commonly called the "Fed," confusing it 
with the U.S. government; but it is actually a private corporation. 4 It 
is so private that its stock is not even traded on the stock exchange. 
The government doesn't own it. You and I can't own it. It is owned 
by a consortium of private banks, the biggest of which are Citibank 
and J. P. Morgan Chase Company. These two mega-banks are the 
financial cornerstones of the empires built by J. P. Morgan and John 


Web of Debt 

D. Rockefeller, the "Robber Barons" who orchestrated the Federal Re- 
serve Act in 1913. (More on this in Chapter 13.) 

As for keeping "reserves," Wright Patman decided to see for him- 
self. Having heard that Federal Reserve Banks hold large amounts of 
cash, he visited two regional Federal Reserve banks, where he was led 
into vaults and shown great piles of government securities (I.O.U.s 
representing debt).' When he asked to see their cash, the bank offi- 
cials seemed confused. He repeated the request, only to be shown 
some ledgers and bank checks. Patman wrote: 

The cash, in truth, does not exist and never has existed. What 
we call "cash reserves" are simply bookkeeping credits entered 
upon the ledgers of the Federal Reserve Banks. These credits are 
created by the Federal Reserve Banks and then passed along 
through the banking system. 5 

Where did the Federal Reserve get the money to acquire all the 
government bonds in its vaults? Patman answered his own rhetorical 

It doesn't get money, it creates it. When the Federal Reserve writes 
a check for a government bond it does exactly what any bank does, 
it creates money, it created money purely and simply by writing a 
check. [When] the recipient of the check wants cash, then the 
Federal Reserve can oblige him by printing the cash — Federal 
Reserve notes — which the check receiver's commercial bank 
can hand over to him. The federal Reserve, in short, is a total 
money-making machine. 6 

Turning Debt into Money 

The Federal Reserve is indispensable to the bankers' money-making 
machine, but the dollar bills it creates represent only a very small 
portion of the money supply. Most money today is created neither by 
the government nor by the Federal Reserve. Rather, it is created by 
private commercial banks. 

The "money supply" is defined as the entire quantity of bills, coins, 
loans, credit, and other liquid instruments in a country's economy. 

' A "security" is a type of transferable interest representing financial value. 
The securities composing the federal debt consist of U.S. Treasury bills (or T- 
bills — securities which mature in a year or less), Treasury notes (which mature 
in two to ten years), and Treasury bonds (which mature in ten years or longer). 


Chapter 2 - Behind the Curtain 

"Liquid" instruments are those that are easily convertible into cash. 
The American money supply is officially divided into Ml, M2, and 
M3. Only Ml is what we usually think of as money - coins, dollar 
bills, and the money in our checking accounts. M2 is Ml plus savings 
accounts, money market funds, and other individual or "small" time 
deposits. (The "money market" is the trade in short-term, low-risk 
securities, such as certificates of deposit and U.S. Treasury notes.) M3 
is Ml and M2 plus institutional and other larger time deposits 
(including institutional money market funds) and eurodollars 
(American dollars circulating abroad). 

In 2005, Ml (coins, dollar bills and checking account deposits) 
tallied in at $1.4 trillion. Federal Reserve Notes in circulation came to 
$758 billion, but about 70 percent of those circulated overseas, bringing 
the figure down to $227.5 billion in use in the United States. 7 The U.S. 
Mint reported that in September 2004, circulating collections of coins 
came to only $993 million, or just under $1 billion. 8 M3 (the largest 
measure of the money supply) was $9.7 trillion in 2005. 9 Thus coins 
made up only about one one-thousandth of the total money supply 
(M3), and tangible currency in the form of coins and Federal Reserves 
Notes (dollar bills) together made up only about 2.4 percent of it. The 
other 97.6 percent magically appeared from somewhere else. This was the 
money Wright Patman said was created by banks when they made 

The mechanics of money creation were explained in a revealing 
booklet published by the Chicago Federal Reserve in the 1960s, called 
"Modern Money Mechanics: A Workbook on Bank Reserves and 
Deposit Expansion." 10 The booklet is a gold mine of insider information 
and will be explored at length later, but here are some highlights. It 
begins, "The purpose of this booklet is to describe the basic process of 
money creation in a 'fractional reserve' banking system. . . . The actual 
process of money creation takes place primarily in banks." The Chicago 
Fed then explains: 

[Banks] do not really pay out loans from the money they receive as 
deposits. If they did this, no additional money would be created. 
What they do when they make loans is to accept promissory 
notes in exchange for credits to the borrowers' transaction 

The booklet explains that money creation is done by "building up" 
deposits, and that this is done by making loans. Contrary to popular 
belief, loans become deposits rather than the reverse. The Chicago Fed 


Web of Debt 

[B]anks can build up deposits by increasing loans and 
investments so long as they keep enough currency on hand to 
redeem whatever amounts the holders of deposits want to 
convert into currency. This unique attribute of the banking 
business was discovered many centuries ago. It started with 
goldsmiths .... 

The "unique attribute" discovered by the goldsmiths was that they 
could issue and lend paper receipts for the same gold many times 
over, so long as they kept enough gold in "reserve" for any depositors 
who might come for their money. This was the sleight of hand later 
dignified as "fractional reserve" banking .... 

The Shell Game of the Goldsmiths Becomes 
"Fractional Reserve" Banking 

Trade in seventeenth century Europe was conducted primarily with 
gold and silver coins. Coins were durable and had value in them- 
selves, but they were hard to transport in bulk and could be stolen if 
not kept under lock and key. Many people therefore deposited their 
coins with the goldsmiths, who had the strongest safes in town. The 
goldsmiths issued convenient paper receipts that could be traded in 
place of the bulkier coins they represented. These receipts were also 
used when people who needed coins came to the goldsmiths for loans. 

The mischief began when the goldsmiths noticed that only about 
10 to 20 percent of their receipts came back to be redeemed in gold at 
any one time. They could safely "lend" the gold in their strongboxes 
at interest several times over, as long as they kept 10 to 20 percent of 
the value of their outstanding loans in gold to meet the demand. They 
thus created "paper money" (receipts for loans of gold) worth several 
times the gold they actually held. They typically issued notes and 
made loans in amounts that were four to five times their actual supply 
of gold. At an interest rate of 20 percent, the same gold lent five times 
over produced a 100 percent return every year - this on gold the gold- 
smiths did not actually own and could not legally lend at all! If they 
were careful not to overextend this "credit," the goldsmiths could thus 
become quite wealthy without producing anything of value themselves. 
Since more money was owed back than the townspeople as a whole 
possessed, the wealth of the town and eventually of the country was 
siphoned into the vaults of these goldsmiths-turned-bankers, while 
the people fell progressively into their debt. 11 


Chapter 2 - Behind the Curtain 

If a landlord had rented the same house to five people at one time 
and pocketed the money, he would quickly have been jailed for fraud. 
But the goldsmiths had devised a system in which they traded, not 
things of value, but paper receipts for them. The system was called 
"fractional reserve" banking because the gold held in reserve was a 
mere fraction of the banknotes it supported. In 1934, Elgin Groseclose, 
Director of the Institute for International Monetary Research, wryly 

A warehouseman, taking goods deposited with him and devoting 
them to his own profit, either by use or by loan to another, is 
guilty of a tort, a conversion of goods for which he is liable in 
civil, if not in criminal, law. By a casuistry which is now elevated 
into an economic principle, but which has no defenders outside 
the realm of banking, a warehouseman who deals in money is 
subject to a diviner law: the banker is free to use for his private 
interest and profit the money left in trust. . . . He may even go 
further. He may create fictitious deposits on his books, which shall 
rank equally and ratably with actual deposits in any division of assets 
in case of liquidation. 12 

A tort is a wrongdoing for which a civil action may be brought for 
damages. Conversion is a tort involving the treatment of another's 
property as one's own. Another tort that has been applied to this 
sleight of hand is fraud, defined in Black's Law Dictionary as "a false 
representation of a matter of fact, whether by words or by conduct, 
by false or misleading allegations, or by concealment of that which 
should have been disclosed, which deceives and is intended to deceive 
another so that he shall act upon it to his legal injury." That term was 
used by the court in a landmark Minnesota lawsuit in 1969 .... 

Taking It to Court 

First National Bank of Montgomery vs. Daly was a courtroom 
drama worthy of a movie script. Defendant Jerome Daly opposed the 
bank's foreclosure on his $14,000 home mortgage loan on the ground 
that there was no consideration for the loan. "Consideration" ("the 
thing exchanged") is an essential element of a contract. Daly, an at- 
torney representing himself, argued that the bank had put up no real 
money for his loan. 

The courtroom proceedings were recorded by Associate Justice Bill 
Drexler, whose chief role, he said, was to keep order in a highly charged 


Web of Debt 

courtroom where the attorneys were threatening a fist fight. Drexler 
hadn't given much credence to the theory of the defense, until Mr. 
Morgan, the bank's president, took the stand. To everyone's surprise, 
Morgan admitted that the bank routinely created the money it lent 
"out of thin air," and that this was standard banking practice. 

"It sounds like fraud to me," intoned Presiding Justice Martin 
Mahoney amid nods from the jurors. In his court memorandum, Jus- 
tice Mahoney stated: 

Plaintiff admitted that it, in combination with the Federal Reserve 
Bank of Minneapolis, . . . did create the entire $14,000.00 in money 
and credit upon its own books by bookkeeping entry. That this was 
the consideration used to support the Note dated May 8, 1964 
and the Mortgage of the same date. The money and credit first 
came into existence when they created it. Mr. Morgan admitted 
that no United States Law or Statute existed which gave him the 
right to do this. A lawful consideration must exist and be tendered to 
support the Note. 

The court rejected the bank's claim for foreclosure, and the defen- 
dant kept his house. To Daly, the implications were enormous. If 
bankers were indeed extending credit without consideration - without 
backing their loans with money they actually had in their vaults and 
were entitled to lend - a decision declaring their loans void could topple 
the power base of the world. He wrote in a local news article: 

This decision, which is legally sound, has the effect of declaring 
all private mortgages on real and personal property, and all U.S. 
and State bonds held by the Federal Reserve, National and State 
banks to be null and void. This amounts to an emancipation of 
this Nation from personal, national and state debt purportedly 
owed to this banking system. Every American owes it to himself 
... to study this decision very carefully . . . for upon it hangs the 
question of freedom or slavery. 13 

Needless to say, however, the decision failed to change prevailing 
practice, although it was never overruled. It was heard in a Justice of 
the Peace Court, an autonomous court system dating back to those 
frontier days when defendants had trouble traveling to big cities to 
respond to summonses. In that system (which has now largely been 
phased out), judges and courts were pretty much on their own. Justice 
Mahoney went so far as to threaten to prosecute and expose the bank. 
He died less than six months after the Daly trial, in a mysterious 
accident that appeared to involve poisoning. 14 


Chapter 2 - Behind the Curtain 

Since that time, a number of defendants have attempted to avoid 
loan defaults using the defense Daly raised; but they have met with 
only limited success. As one judge said off the record, using a familiar 
Wizard of Oz metaphor: 

If I let you do that - you and everyone else - it would bring the 
whole system down. ... I cannot let you go behind the bar of the 
bank. . . . We are not going behind that curtain^} 5 

In an informative website called Money: What It Is, How It Works, 
William Hummel states that banks today account for only about 20 
percent of total credit market debt. The rest is advanced by non-bank 
financial institutions, including finance companies, pension funds, 
mutual funds, insurance companies, and securities dealers. These in- 
stitutions merely recycle pre-existing funds, either by borrowing at a 
low interest rate and lending at a higher rate or by pooling the money 
of investors and lending it to borrowers. In other words, they do what 
most people think banks do: they borrow low and lend high, pocket- 
ing the "spread" as their profit. What banks actually do, however, is 
something quite different. Hummel explains: 

Banks are not ordinary intermediaries. Like non-banks, they 
also borrow, but they do not lend the deposits they acquire. They 
lend by crediting the borrower's account with a new deposit .... The 
accounts of other depositors remain intact and their deposits 
fully available for withdrawal. Thus a bank loan increases the 
total of bank deposits, which means an increase in the money supply } b 

If the money supply is being increased, money is being created by 
sleight of hand. What Elgin Groseclose called the "diviner law" of the 
bankers allows them to magically pull money out of an empty hat. 

The "Impossible Contract" 

There are other legal grounds on which the bankers' fractional 
reserve loans might be challenged besides failure of consideration and 
fraud. In theory, at least, these loan contracts could be challenged 
because they are collectively impossible to perform. Under state civil 
codes, a contract that is impossible to perform is void. 17 The 
impossibility in this case arises because the banks create the principal 
but not the interest needed to pay back their loans. The debtors 
scramble to find the interest somewhere else, but there is never enough 
money to go around. Like in a grand game of musical chairs, when 
the music stops, somebody has to default. In an 1850 treatise called 


Web of Debt 

The Importance of Usury Laws, a writer named John Whipple did the 
math. He wrote: 

If 5 English pennies . . . had been [lent] at 5 per cent compound 
interest from the beginning of the Christian era until the present 
time (say 1850), it would amount in gold of standard fineness to 
32,366,648,157 spheres of gold each eight thousand miles in 
diameter, or as large as the earth. 18 

Thirty-two billion earth-sized spheres! Such is the nature of 
compound interest — interest calculated not only on the initial principal 
but on the accumulated interest of prior payment periods. The interest 
"compounds" in a parabolic curve that is virtually flat at first but goes 
nearly vertical after 100 years. Debts don't usually grow to these 
extremes because most loans are for 30 years or less, when the curve 
remains relatively flat. But the premise still applies: in a system in 
which money comes into existence only by borrowing at interest, the 
system as a whole is always short of funds, and somebody has to default. 

Bernard Lietaer helped design the single currency system (the Euro) 
and has written several books on monetary reform. He explains the 
interest problem like this: 

When a bank provides you with a $100,000 mortgage, it creates 
only the principal, which you spend and which then circulates 
in the economy. The bank expects you to pay back $200,000 
over the next 20 years, but it doesn't create the second $100,000 
— the interest. Instead, the bank sends you out into the tough 
world to battle against everybody else to bring back the second 

The problem is that all money except coins now comes from banker- 
created loans, so the only way to get the interest owed on old loans is 
to take out new loans, continually inflating the money supply; either 
that, or some borrowers have to default. Lietaer concluded: 

[G]reed and competition are not a result of immutable human 
temperament .... [Gjreed and fear of scarcity are in fact being 
continuously created and amplified as a direct result of the kind of 
money we are using. . . . [W]e can produce more than enough 
food to feed everybody, and there is definitely enough work for 
everybody in the world, but there is clearly not enough money 
to pay for it all. The scarcity is in our national currencies. In fact, 
the job of central banks is to create and maintain that currency scarcity. 
The direct consequence is that we have to fight with each other in 
order to survive. 19 


Chapter 2 - Behind the Curtain 

$10,000 lent at 6% interest compounded annually 

Adapted from: 

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 

Years Held 

A dollar lent at 6 percent interest, compounded annually, becomes 
ten dollars in less than 40 years. That means that if the money supply 
were 100 percent gold, and if banks lent 10 percent of it at 6 percent 
interest compounded annually (continually rolling principal and in- 
terest over into more loans), in 40 years the bankers would own all the 
gold. It also means that the inflation everyone complains about is 
actually necessary to keep the scheme going. To keep workers on the 
treadmill that powers their industrial empire, the financiers must cre- 
ate enough new debt-money to cover the interest on their loans. They 
don't want to create too much, as that would dilute the value of their 
own share of the pie; but in a "credit crisis" such as we are facing 
today, the central banks can and do flood the market with money 
created with accounting entries. In a single day in August 2007, the 
U.S. Federal Reserve "injected" $38 billion into the financial markets 
to rescue troubled banks and investment firms. Where did this money 
come from? It was just an advance of "credit," something central 
banks claim the right to do as "lenders of last resort." These advances 
can be rolled over or renewed indefinitely, creating a stealth inflation 
that drives up prices at the pump and the grocery store. 20 (More on 
this later.) 


Web of Debt 

The Money Supply and the Federal Debt 

To keep the economic treadmill turning, not only must the money 
supply continually inflate but the federal debt must continually 
expand. The reason was revealed by Marriner Eccles, Governor of the 
Federal Reserve Board, in hearings before the House Committee on 
Banking and Currency in 1941. Wright Patman asked Eccles how the 
Federal Reserve got the money to buy government bonds. 

"We created it," Eccles replied. 

"Out of what?" 

"Out of the right to issue credit money." 

"And there is nothing behind it, is there, except our government's 

"That is what our money system is," Eccles replied. "If there were 
no debts in our money system, there wouldn't be any money." 11 

That explains why the federal debt never gets paid off but just 
continues to grow. The federal debt hasn't been paid off since the 
presidency of Andrew Jackson nearly two centuries ago. Rather, in 
all but five fiscal years since 1961 (1969 and 1998 through 2001), the 
government has exceeded its projected budget, adding to the national 
debt. 22 Economist John Kenneth Galbraith wrote in 1975: 

In numerous years following the [civil] war, the Federal 
Government ran a heavy surplus. [But] it could not pay off its 
debt, retire its securities, because to do so meant there would be 
no bonds to back the national bank notes. To pay off the debt was 
to destroy the money supply. 23 

The federal debt has been the basis of the U.S. money supply ever 
since the Civil War, when the National Banking Act authorized private 
banks to issue their own banknotes backed by government bonds 
deposited with the U.S. Treasury. (This complicated bit of chicanery 
is explored in Chapter 9.) When President Clinton announced "the 
largest budget surplus in history" in 2000, and President Bush 
predicted a $5.6 trillion surplus by the end of the decade, many people 
got the impression that the federal debt had been paid off; but this 
was another illusion. Not only did the $5.6 trillion budget "surplus" 
never materialize (it was just an optimistic estimate projected over a 
ten-year period based on an anticipated surplus for the year 2001 
that never materialized), but it entirely ignored the principal owing on 
the federal debt. Like the deluded consumer who makes the minimum 
monthly interest payment on his credit card bill and calls his credit 


Chapter 2 - Behind the Curtain 

limit "cash on hand," politicians who speak of "balancing the budget" 
include in their calculations only the interest on the national debt. By 
2000, when President Clinton announced the largest-ever budget 
surplus, the federal debt had actually topped $5 trillion; and by October 
2005, when the largest-ever projected surplus had turned into the 
largest-ever budget deficit, the federal debt had mushroomed to $8 
trillion. M3 was $9.7 trillion the same year, not much more. It is 
hardly an exaggeration to say that the money supply is the federal debt 
and cannot exist without it. Commercial loans alone cannot sustain the 
money supply because they zero out when they get paid back. In 
order to keep money in the system, some major player has to incur 
substantial debt that never gets paid back; and this role is played by 
the federal government. 

That is one reason the federal debt can't be paid off, but today 
there is an even more compelling reason: the debt has simply grown 
too large. To get some sense of the magnitude of an 8-plus trillion 
dollar debt, if you took 7 trillion steps you could walk to the planet 
Pluto, which is a mere 4 billion miles away. 24 If the government were 
to pay $100 every second, in 317 years it would have paid off only one 
trillion dollars of debt. And that's just for the principal. If interest 
were added at the rate of only 1 percent compounded annually, the 
debt could never be paid off in this way, because the debt would grow 
faster than it was being repaid. 25 Paying an $8-plus trillion debt off in 
a lump sum through taxation, on the other hand, would require in- 
creasing the tax bill by more than $100,000 for every family of four, a 
non-starter for most families. 26 

In the 1980s, policymakers openly declared that "deficits don't 
matter." The government could engage in "deficit spending" and 
simply allow the debt to grow. This policy continues to be cited with 
approval by policymakers today. 27 The truth is that nobody even expects 
the debt to be paid off, because it can't be paid off - at least, it can't while 
money is created as a debt to private banks. The government doesn't 
have to pay the principal so long as it keeps "servicing" the debt by 
paying the interest. But according to David M. Walker, Director of 
the U.S. General Accounting Office and Comptroller General of the 
United States, just the interest tab will soon be more than the taxpayers 
can afford to pay. When the government can't pay the interest, it will 
have to renege on the debt, and the economy will collapse. 28 

How did we get into this witches' cauldron, and how can we get 
out of it? The Utopian vision of the early American colonists involved 
a money system that was quite different from what we have today. 
To understand what we lost and how we lost it, we'll take a journey 
back down the Yellow Brick Road to eighteenth century America. 


Chapter 3 

Dorothy and her friends were at first dazzled by the brilliancy of 
the wonderful City. The streets were lined with beautiful houses all 
built of green marble and studded everywhere with sparkling emeralds. 
They walked over a pavement of the same green marble, and where 
the blocks were joined together were rows of emeralds, set closely, 
and glittering in the brightness of the sun. . . . Everyone seemed 
happy and contented and prosperous. 

- The Wonderful Wizard ofOz, 
"The Emerald City ofOz" 

Frank Baum's vision of a magical city shimmering in the sun 
captured the Utopian American dream. Walt Disney would 
later pick up the vision with his castles in the clouds, the happily- 
ever-after endings to romantic Hollywood fairytales. Baum, who was 
Irish, may have been thinking of the Emerald Isle, the sacred land of 
Ireland. The Emerald City also suggested the millennial visions of the 
Biblical New Jerusalem and the "New Atlantis," the name Sir Francis 
Bacon gave to the New World. 

The American colonies were an experiment in Utopia. In an 
uncharted territory, you could design new systems and make new 
rules. Paper money was already in use in England, but it had fallen 
into the hands of private bankers who were using it for private profit 
at the expense of the people. In the American version of this new 
medium of exchange, paper money was issued and lent by provincial 
governments, and the proceeds were used for the benefit of the people. 
The colonists' new paper money financed a period of prosperity that 
was considered remarkable for isolated colonies lacking their own 


Chapter 3 - Experiments in Utopia 

silver and gold. By 1750, Benjamin Franklin was able to write of New 

There was abundance in the Colonies, and peace was reigning 
on every border. It was difficult, and even impossible, to find a 
happier and more prosperous nation on all the surface of the 
globe. Comfort was prevailing in every home. The people, in 
general, kept the highest moral standards, and education was 
widely spread. 

Money as Credit 

The distinction of being the first local government to issue its own 
paper money went to the province of Massachusetts. The year was 
1691, three years before the charter of the Bank of England. Jason 
Goodwin, who tells the story in his 2003 book Greenback, writes that 
Massachusetts' buccaneer governor had led a daring assault on Quebec 
in an attempt to drive the French out of Canada; but the assault had 
failed. Militiamen and widows needed to be paid. The local merchants 
were approached but had declined, saying they had other demands 
on their money. 

The idea of a paper currency had been suggested in 1650, in an 
anonymous British pamphlet titled "The Key to Wealth, or, a New 
Way for Improving of Trade: Lawfull, Easie, Safe and Effectual." The 
paper currency proposed by the pamphleteer, however, was modeled 
on the receipts issued by London goldsmiths and silversmiths for the 
precious metals left in their vaults for safekeeping. The problem for 
the colonies was that they were short of silver and gold. They had to 
use foreign coins to conduct trade; and since they imported more than 
they exported, the coins were continually being drained off to England 
and other countries, leaving the colonists without enough money for 
their own internal needs. The Massachusetts Assembly therefore 
proposed a new kind of paper money, a "bill of credit" representing 
the government's "bond" or I.O.U. - its promise to pay tomorrow on 
a debt incurred today. The paper money of Massachusetts was backed 
only by the "full faith and credit" of the government. 1 

Other colonies then followed suit with their own issues of paper 
money. Some were considered government I.O.U.s, redeemable later 
in "hard" currency (silver or gold). Other issues were "legal tender" 
in themselves. Legal tender is money that must legally be accepted in 
the payment of debts. It is "as good as gold" in trade, without bearing 


Web of Debt 

debt or an obligation to redeem the notes in some other form of money 
later. 2 

When confidence in the new paper money waned, Cotton Mather, 
who was then the most famous minister in New England, came to its 
defense. He argued: 

Is a Bond or Bill-of-Exchange for £1000, other than paper? And 
yet is it not as valuable as so much Silver or Gold, supposing the 
security of Payment is sufficient? Now what is the security of 
your Paper-money less than the Credit of the whole Country? 3 

Mather had redefined money. What it represented was not a sum 
of gold or silver. It was credit: "the credit of the whole country." 

The Father of Paper Money 

Benjamin Franklin was such an enthusiast for the new medium of 
exchange that he has been called "the father of paper money." Unlike 
Cotton Mather, who went to Harvard at the age of 12, Franklin was 
self-taught. He learned his trade on the job, and his trade happened 
to be printing. In 1729, he wrote and printed a pamphlet called "A 
Modest Enquiry into the Nature and Necessity of a Paper-Currency," 
which was circulated throughout the colonies. It became very popular, 
earning him contracts to print paper money for New Jersey, 
Pennsylvania, and Delaware. 4 

Franklin wrote his pamphlet after observing the remarkable effects 
that paper currency had had in stimulating the economy in his home 
province of Pennsylvania. He said, "Experience, more prevalent than 
all the logic in the World, has fully convinced us all, that [paper money] 
has been, and is now of the greatest advantages to the country." Paper 
currency secured against future tax revenues, he said, turned 
prosperity tomorrow into ready money today. The government did 
not need gold to issue this currency, and it did not need to go into 
debt to the banks. In America, the land of opportunity, this ready 
money would allow even the poor to get ahead. Franklin wrote, 
"Many that understand . . . Business very well, but have not a Stock 
sufficient of their own, will be encouraged to borrow Money; to trade 
with, when they have it at a moderate interest." 

He also said, "The riches of a country are to be valued by the 
quantity of labor its inhabitants are able to purchase and not by the 
quantity of gold and silver they possess." When gold was the medium 
of exchange, money determined production rather than production 


Chapter 3 - Experiments in Utopia 

determining the money supply. When gold was plentiful, things got 
produced. When it was scarce, men were out of work and people 
knew want. The virtue of government-issued paper scrip was that it 
could grow along with productivity, allowing potential wealth to 
become real wealth. The government could pay for services with paper 
receipts that were basically community credits. In this way, the 
community actually created supply and demand at the same time. The 
farmer would not farm, the teacher would not teach, the miner would 
not mine, unless the funds were available to compensate them for 
their labors. Paper "scrip" underwrote the production of goods and 
services that would not otherwise have been on the market. Anything 
for which there was a buyer and a producer could be produced and 
traded. If A had what B wanted, B had what C wanted, and C had 
what A wanted, they could all get together and trade. They did not 
need the moneylenders' gold, which could be hoarded, manipulated, 
or lent only at usurious interest rates. 

Representation Without Taxation 

The new paper money did more than make the colonies 
independent of the British bankers and their gold. It actually allowed 
the colonists to finance their local governments without taxing the people. 
Alvin Rabushka, a senior fellow at the Hoover Institution at Stanford 
University, traces this development in a 2002 article called 
"Representation Without Taxation." He writes that there were two 
main ways the colonies issued paper money. Most colonies used both, 
in varying proportions. One was a direct issue of notes, usually called 
"bills of credit" or "treasury notes." These were I.O.U.s of the 
government backed by specific future taxes; but the payback was 
deferred well into the future, and sometimes the funds never got 
returned to the treasury at all. Like in a bathtub without a drain, the 
money supply kept increasing without a means of recycling it back to 
its source. However, the funds were at least not owed back to private 
foreign lenders, and no interest was due on them. They were just 
credits issued and spent into the economy on goods and services. 

The recycling problem was solved when a second method of issue 
was devised. Colonial assemblies discovered that provincial loan offices 
could generate a steady stream of revenue in the form of interest by 
taking on the lending functions of banks. A government loan office called 
a "land bank" would issue paper money and lend it to residents 


Web of Debt 

(usually farmers) at low rates of interest. The loans were secured by 
mortgages on real property, silver plate, and other hard assets. 
Franklin wrote, "Bills issued upon Land are in Effect Coined Land." 
New money issued and lent to borrowers came back to the loan office 
on a regular payment schedule, preventing the money supply from 
over-inflating and keeping the values of paper loan-office bills stable 
in terms of English sterling. The interest paid on the loans also went 
into the public coffers, funding the government. Colonies relying on 
this method of issuing paper money thus wound up with more stable 
currencies than those relying heavily on new issues of bills of credit. 

The most successful loan offices were in the middle colonies - 
Pennsylvania, Delaware, New York and New Jersey. The model that 
earned the admiration of all was the loan office established in 
Pennsylvania in 1723. The Pennsylvania plan showed that it was 
quite possible for the government to issue new money in place of taxes 
without inflating prices. From 1723 until the French and Indian War 
in the 1750s, the provincial government collected no taxes at all. The 
loan office was the province's chief source of revenue, supplemented 
by import duties on liquor. During this period, Pennsylvania wholesale 
prices remained stable. The currency depreciated by 21 percent against 
English sterling, but Rabushka shows that this was due to external 
trade relations rather than to changes in the quantity of currency in 
circulation. 5 

Before the loan office came to the rescue, Pennsylvania had been 
losing both business and residents due to a lack of available currency. 
The loan office injected new money into the economy, and it allowed 
people who had been forced to borrow from private bankers at 8 
percent interest to refinance their debts at the 5 percent rate offered 
by the provincial government. Franklin said that this money system 
was the reason that Pennsylvania "has so greatly increased in 
inhabitants," having replaced "the inconvenient method of barter" 
and given "new life to business [and] promoted greatly the settlement 
of new lands (by lending small sums to beginners on easy interest)." 
When he was asked by the directors of the Bank of England why the 
colonies were so prosperous, he replied that they issued paper money 
"in proper proportions to the demands of trade and industry." The 
secret was in not issuing too much, and in recycling the money back 
to the government in the form of principal and interest on government- 
issued loans. 

The paper currencies of the New England colonies - Massachusetts, 
Rhode Island, Connecticut and New Hampshire - were less successful 


Chapter 3 - Experiments in Utopia 

than those of the middle colonies, mainly because they failed to limit 
their issues to these "proper proportions," or to recycle the money 
back to the government. The paper money of the New England 
colonies helped to finance development and growth that would not 
otherwise have occurred, but the currencies did not maintain their 
value, because bills of credit were issued in far greater quantities than 
the provincial governments ever hoped to redeem. Because the money 
was pumped into the economy without flowing back to the 
government, the currency depreciated and price inflation resulted. 

King George Steps In 

Rapid depreciation of the New England bills eventually threatened 
the investments of British merchants and financiers who were doing 
business with the colonies, and they leaned on Parliament to prohibit 
the practice. In 1751, King George II enacted a ban on the issue of all 
new paper money in the New England colonies, forcing the colonists 
to borrow instead from the British bankers. This ban was continued 
under King George III, who succeeded his father in 1752. 

In 1764, Franklin went to London to petition Parliament to lift the 
ban. When he arrived, he was surprised to find rampant unemploy- 
ment and poverty among the British working classes. "The streets 
are covered with beggars and tramps," he observed. When he asked 
why, he was told the country had too many workers. The rich were 
already overburdened with taxes and could not pay more to relieve 
the poverty of the working classes. Franklin was then asked how the 
American colonies managed to collect enough money to support their 
poor houses. He reportedly replied: 

We have no poor houses in the Colonies; and if we had some, 
there would be nobody to put in them, since there is, in the 
Colonies, not a single unemployed person, neither beggars nor tramps. 6 

His English listeners had trouble believing this, since when their 
poor houses and jails had become too cluttered, the English had actu- 
ally shipped their poor to the Colonies. The directors of the Bank of 
England asked what was responsible for the booming economy of the 
young colonies. Franklin replied: 

That is simple. In the colonies we issue our own money. It is 
called Colonial Scrip. We issue it to pay the government's 
approved expenses and charities. We make sure it is issued in 
proper proportions to make the goods pass easily from the 


Web of Debt 

producers to the consumers. ... In this manner, creating for 
ourselves our own paper money, we control its purchasing 
power, and we have no interest to pay to no one. You see, a 
legitimate government can both spend and lend money into 
circulation, while banks can only lend significant amounts of 
their promissory bank notes, for they can neither give away nor 
spend but a tiny fraction of the money the people need. Thus, 
when your bankers here in England place money in circulation, 
there is always a debt principal to be returned and usury to be 
paid. The result is that you have always too little credit in 
circulation to give the workers full employment. You do not have 
too many workers, you have too little money in circulation, and that 
which circulates, all bears the endless burden of unpayable debt and 
usury. 7 

Banks were limited to lending money into the economy; and since 
more money was always owed back in principal and interest (or 
"usury") than was lent in the original loans, there was never enough 
money in circulation to pay the interest and still keep workers fully 
employed. The government, on the other hand, had two ways of getting 
money into the economy: it could both lend and spend the money into 
circulation. It could spend enough new money to cover the interest due on 
the money it lent, keeping the money supply in "proper proportion" 
and preventing the "impossible contract" problem — the problem of 
having more money owed back on loans than was created by the 
loans themselves. 

After extolling the benefits of colonial scrip to the citizens of 
Pennsylvania, Franklin told his listeners, "New York and New Jersey 
have also increased greatly during the same period, with the use of 
paper money; so that it does not appear to be of the ruinous nature 
ascribed to it." Jason Goodwin observes that it was a tricky argument 
to make. The colonists had been stressing to the mother country how 
poor they were — so poor, they were forced to print paper money for 
lack of precious metals. Franklin's report demonstrated to Parliament 
and the British bankers that the pretext for allowing paper money 
had been removed. The point of having colonies was not, after all, to 
bolster the colonies' economies. It was to provide raw materials at 
decent rates to the mother country. In 1764, the Bank of England 
used its influence on Parliament to get a Currency Act passed that 
made it illegal for any of the colonies to print their own money. 8 The 
colonists were forced to pay all future taxes to Britain in silver or gold. 


Chapter 3 - Experiments in Utopia 

Anyone lacking in those precious metals had to borrow them at interest 
from the banks. 

Only a year later, Franklin said, the streets of the colonies were 
filled with unemployed beggars, just as they were in England. The 
money supply had suddenly been reduced by half, leaving insufficient 
funds to pay for the goods and services these workers could have 
provided. He maintained that it was "the poverty caused by the bad 
influence of the English bankers on the Parliament which has caused 
in the colonies hatred of the English and . . . the Revolutionary War." 
This, he said, was the real reason for the Revolution: "The colonies 
would gladly have borne the little tax on tea and other matters had it 
not been that England took away from the colonies their money, which 
created unemployment and dissatisfaction." John Twells, an English 
historian, confirmed this view of the Revolution, writing: 

In a bad hour, the British Parliament took away from America 
its representative money, forbade any further issue of bills of 
credit, these bills ceasing to be legal tender, and ordered that all 
taxes should be paid in coins. Consider now the consequences: 
this restriction of the medium of exchange paralyzed all the 
industrial energies of the people. Ruin took place in these once 
flourishing Colonies; most rigorous distress visited every family 
and every business, discontent became desperation, and reached 
a point, to use the words of Dr. Johnson, when human nature 
rises up and asserts its rights. 9 

Alexander Hamilton, the nation's first Treasury Secretary, said 
that paper money had composed three-fourths of the total money 
supply before the American Revolution. When the colonists could 
not issue their own currency, the money supply had suddenly shrunk, 
leaving widespread unemployment, hunger and poverty in its wake. 
Unlike in the Great Depression of the 1930s, people in the 1770s were 
keenly aware of who was responsible for their distress. One day they 
were trading freely with their own paper money. The next day it was 
gone, banned by order of a king an ocean away, who demanded 
tribute in the coin of the British bankers. The outraged populace 
ignored the ban and went back to issuing their own paper money. In 
his illuminating monetary history The Lost Science of Money, Stephen 
Zarlenga quotes historian Alexander Del Mar, who wrote in 1895: 
[T]he creation and circulation of bills of credit by revolutionary 
assemblies . . . coming as they did upon the heels of the strenuous 
efforts made by the Crown to suppress paper money in America 


Web of Debt 

[were] acts of defiance so contemptuous and insulting to the 
Crown that forgiveness was thereafter impossible . . . [T]here 
was but one course for the Crown to pursue and that was to 
suppress and punish these acts of rebellion .... Thus the Bills of 
Credit of this era, which ignorance and prejudice have attempted to 
belittle into the mere instruments of a reckless financial policy were 
really the standards of the Revolution. They were more than this: 
they were the Revolution itself l w 

The Cornerstone of the Revolution 

Like Massachusetts nearly a century earlier, the colonies suddenly 
found themselves at war and without the means to pay for it. The 
first act of the new Continental Congress was to issue its own paper 
scrip, popularly called the Continental. Most of the Continentals were 
issued as I.O.U.s or debts of the revolutionary government, to be 
redeemed in coinage later. 11 Eventually, 200 million dollars in 
Continental scrip were issued. By the end of the war, the scrip had 
been devalued so much that it was essentially worthless; but it still 
evoked the wonder and admiration of foreign observers, because it 
allowed the colonists to do something that had never been done 
before. They succeeded in financing a war against a major power, 
with virtually no "hard" currency of their own, without taxing the 
people. Franklin wrote from England during the war, "the whole is a 
mystery even to the politicians, how we could pay with paper that 
had no previously fixed fund appropriated specifically to redeem it. 
This currency as we manage it is a wonderful machine." Thomas Paine 
called it a "corner stone" of the Revolution: 

Every stone in the Bridge, that has carried us over, seems to 
have claim upon our esteem. But this was a corner stone, and 
its usefulness cannot be forgotten. 12 

The Continental's usefulness was forgotten, however, with a little 
help from the Motherland .... 


Chapter 3 - Experiments in Utopia 

Economic Warfare: The Bankers Counterattack 

The British engaged in a form of economic warfare that would be 
used again by the bankers in the nineteenth century against Lincoln's 
Greenbacks and in the twentieth century against a variety of other 
currencies: they attacked their competitor's currency and drove down 
its value. In the 1770s, when paper money was easy to duplicate, its 
value could be diluted by physically flooding the market with coun- 
terfeit money. In modern times, as we'll see later, the same effect is 
achieved by another form of counterfeiting known as the "short sale." 
During the Revolution, Continentals were shipped in by the boatload 
and could be purchased in any amount, essentially for the cost of the 
paper on which they were printed. Thomas Jefferson estimated that 
counterfeiting added $200 million to the money supply, effectively 
doubling it; and later historians thought this figure was quite low. 
Zarlenga quotes nineteenth century historian J. W. Schuckers, who 
wrote, "The English Government which seems to have a mania for 
counterfeiting the paper money of its enemies entered into competi- 
tion with private criminals." 

The Continental was battered but remained viable. Schuckers 
quoted a confidential letter from an English general to his superiors, 
stating that "the experiments suggested by your Lordships have been 
tried, no assistance that could be drawn from the power of gold or 
the arts of counterfeiting have been left untried; but still the currency . 
. . has not failed." 13 

The beating that did take down the Continental was from 
speculators — mostly northeastern bankers, stockbrokers and 
businessmen — who bought up the revolutionary currency at a fraction 
of its value, after convincing people it would be worthless after the 
war. The Continental had to compete with other currencies, rendering 
it vulnerable to speculative attack in the same way that foreign 
currencies left to "float" in international markets are vulnerable today. 
(More on this in Chapters 21 and 22.) The Continental had to compete 
with the States' paper notes and the British bankers' gold and silver 
coins. Gold and silver were regarded as far more valuable than the 
paper promises of a revolutionary government that might not prevail, 
and the States' paper notes had the taxation power to back them. 
The problem might have been avoided by making the Continental the 
sole official currency, but the Continental Congress did not yet have 
the power to enforce that sort of order. It had no courts, no police, 


Web of Debt 

and no authority to collect taxes to redeem the notes or contract the 
money supply. The colonies had just rebelled against taxation by the 
British and were not ready to commit to that burden from the new 
Congress. 14 Speculators took advantage of these weaknesses by buying 
up Continentals at a deeper and deeper discount until they became 
virtually worthless, giving rise to the expression "not worth a 


Chapter 4 

The Witch happened to look into the child's eyes and saw how 
simple the soul behind them was, and that the little girl did not know 
of the wonderful power the Silver Shoes gave her. So the Wicked 
Witch laughed to herself and thought, "I can still make her my slave, 
for she does not know how to use her power." 

- The Wonderful Wizard ofOz, 
"The Search for the Wicked Witch" 

Tust as Dorothy did not know the power of the silver shoes on 
J her feet, so the new country's leaders failed to recognize the power 
of the government-issued paper money Tom Paine had called "a cor- 
nerstone of the Revolution." The economic subservience King George 
could not achieve by force was achieved by the British bankers by 
stealth, by persuading the American people that they needed the bank- 
ers' paper money instead of their own. 

President John Adams is quoted as saying, "There are two ways to 
conquer and enslave a nation. One is by the sword. The other is by 
debt." Sheldon Emry, expanding on this concept two centuries later, 
observed that conquest by the sword has the disadvantage that the 
conquered are likely to rebel. Continual force is required to keep them 
at bay. Conquest by debt can occur so silently and insidiously that the 
conquered don't even realize they have new masters. On the surface, 
nothing has changed. The country is merely under new management. 
"Tribute" is collected in the form of debts and taxes, which the people 
believe they are paying for their own good. "Their captors," wrote 
Emry, "become their 'benefactors' and 'protectors.'. . . Without realiz- 
ing it, they are conquered, and the instruments of their own society 


Chapter 4 - How the Government Was Persuaded 

are used to transfer their wealth to their captors and make the con- 
quest complete." 1 

Colonies in the seventeenth and eighteenth centuries all had the 
same purpose - to enhance the economy of the mother country. That 
was how the mother country saw it, but the American colonists had 
long opposed any plan that would systematically drain their money 
supply off to England. The British had considered the idea of a land 
bank as far back as 1754, as a way to provide a circulating medium of 
exchange for the colonies; but the idea was rejected by the colonists 
when they learned that the interest the bank generated would be sub- 
ject to appropriation by the King. 2 It was only after the American 
Revolution that British bankers and their Wall Street vassals succeeded 
in pulling this feat off by stealth, by acquiring a controlling interest in 
the stock of the new United States Bank. 

The first step in that silent conquest was to discredit the paper 
scrip issued by the revolutionary government and the States. By the 
end of the Revolution, that step had been achieved. Rampant coun- 
terfeiting and speculation had so thoroughly collapsed the value of 
the Continental that the new country's leaders were completely disil- 
lusioned with what they called "unfunded paper." At the Constitu- 
tional Convention, Alexander Hamilton, Washington's new Secretary 
of the Treasury, summed up the majority view when he said: 

To emit an unfunded paper as the sign of value ought not to 
continue a formal part of the Constitution, nor ever hereafter to 
be employed; being, in its nature, repugnant with abuses and 
liable to be made the engine of imposition and fraud. 3 

The Founding Fathers were so disillusioned with paper money that 
they simply omitted it from the Constitution. Congress was given the 
power only to "coin money, regulate the value thereof," and "to bor- 
row money on the credit of the United States . . . ." An enormous 
loophole was thus left in the law. Creating and issuing money had 
long been considered the prerogative of governments, but the Consti- 
tution failed to define exactly what "money" was. Was "to coin money" 
an eighteenth-century way of saying "to create money"? Did this 
include creating paper money? If not, who did have the power to 
create paper money? Congress was authorized to "borrow" money, 
but did that include borrowing paper money or just gold? The pre- 
sumption was that the paper notes borrowed from the bankers were 
"secured" by a sum of silver or gold; but in the illusory world of fi- 
nance, then as now, things were not always as they seemed .... 


Web of Debt 

The Bankers' Paper Money Comes in 
Through the Back Door 

While the Founding Fathers were pledging their faith in gold and 
silver as the only "sound" money, those metals were quickly proving 
inadequate to fund the new country's expanding economy. The na- 
tional war debt had reached $42 million, with no silver or gold coins 
available to pay it off. The debt might have been avoided if the gov- 
ernment had funded the war with Continental scrip that was stamped 
"legal tender," making it "money" in itself; but the revolutionary gov- 
ernment and the States had issued much of their paper money as prom- 
issory notes payable after the war. The notes represented debt, and 
the debt had now come due. The bearers expected to get their gold, 
and the gold was not to be had. There was also an insufficient supply 
of money for conducting trade. Tightening the money supply by lim- 
iting it to coins had quickly precipitated another depression. In 1786, 
a farmers' rebellion broke out in Massachusetts, led by Daniel Shays. 
Farmers brandishing pitchforks complained of going heavily into debt 
when paper money was plentiful. When it was no longer available 
and debts had to be repaid in the much scarcer "hard" coin of the 
British bankers, some farmers lost their farms. The rebellion was de- 
fused, but visions of anarchy solidified the sense of an urgent need for 
both a strong central government and an expandable money supply. 

The solution of Treasury Secretary Hamilton was to "monetize" 
the national debt/ by turning it into a source of money for the coun- 
try. 4 He proposed that a national bank be authorized to print up 
banknotes and swap them for the government's bonds. 5 The govern- 
ment would pay regular interest on the debt, using import duties and 
money from the sale of public land. Opponents said that acknowl- 
edging the government's debt at face value would unfairly reward 
the speculators who had bought up the country's I.O.U.s for a pit- 
tance from the soldiers, farmers and small businessmen who had ac- 
tually earned them; but Hamilton argued that the speculators had 
earned this windfall for their "faith in the country." He thought the 
government needed to enlist the support of the speculators, or they 
would do to the new country's money what they had done to the 
Continental. Vernon Parrington, a historian writing in the 1920s, said: 

1 To monetize means to convert government debt from securities evidencing 
debt (bills, bonds and notes) into currency that can be used to purchase goods 
and services. 


Chapter 4 - How the Government Was Persuaded 

In developing his policies as Secretary of the Treasury, [Hamilton] 
applied his favorite principle, that government and property 
must join in a close working alliance. It was notorious that during 
the Revolution men of wealth had forced down the continental currency 
for speculative purposes; was it not as certain that they would 
support an issue in which they were interested? The private 
resources of wealthy citizens would thus become an asset of 
government, for the bank would link "the interest of the State in 
an intimate connection with those of the rich individuals 
belonging to it." 6 

Hamilton thought that the way to keep wealthy speculators from 
destroying the new national bank was to give them a financial stake 
in it. His proposal would do this and dispose of the government's 
crippling debts at the same time, by allowing creditors to trade their 
government bonds or I.O.U.s for stock in the new bank. 

Jefferson, Hamilton's chief political opponent, feared that giving 
private wealthy citizens an ownership interest in the bank would link 
their interests too closely with it. The government would be turned 
into an oligarchy, a government by the rich at war with the working 
classes. A bank owned by private stockholders, whose driving motive 
was profit, would be less likely to be responsive to the needs of the 
public than one that was owned by the public and subject to public 
oversight. Stockholders of a private bank would make their financial 
decisions behind closed doors, without public knowledge or control. 

But Hamilton's plan had other strategic advantages, and it won 
the day. Besides neatly disposing of a crippling federal debt and 
winning over the "men of wealth," it secured the loyalty of the 
individual States by making their debts too exchangeable for stock in 
the new Bank. The move was controversial; but by stabilizing the 
States' shaky finances, Hamilton got the States on board, thwarting 
the plans of the pro-British faction that hoped to split them up and 
establish a Northern Confederacy. 7 

Promoting the General Welfare: 
The American System Versus the British System 

Hamilton's goal was first and foremost a strong federal government. 
He was the chief author of The Federalist Papers, which helped to get 
the votes necessary to ratify the Constitution and formed the basis for 
much of it. The Preamble to the Constitution made promoting the 


Web of Debt 

general welfare a guiding principle of the new Republic. Hamilton's 
plan for achieving this ideal was to nurture the country's fledgling 
industries with protective measures such as tariffs (taxes placed on 
imports or exports) and easy credit provided through a national bank. 
Production and the money to finance it would all be kept "in house," 
independent of foreign financiers. 

Senator Henry Clay later called this the "American system" to 
distinguish it from the "British system" of "free trade."" Clay was a 
student of Matthew Carey, a well-known printer and publisher who 
had been tutored by Benjamin Franklin. What Clay called the "Brit- 
ish system" was rooted in the dog-eat-dog world of Thomas Hobbes, 
John Locke and Scottish economist Adam Smith. Smith maintained 
in his 1776 book The Wealth of Nations that if every man pursued his 
own greed, all would automatically come out right, as if by some "in- 
visible hand." Proponents of the American system rejected this laissez- 
faire approach in favor of guiding and protecting the young country 
with a system of rules and regulations. They felt that if the economy 
were left to the free market, big monopolies would gobble up small 
entrepreneurs; foreign bankers and industrialists could exploit the 
country's labor and materials; and competition would force prices 
down, ensuring subjugation to British imperial interests. 

The British model assumed that one man's gain could occur only 
through another's loss. The goal was to reach the top of the heap by 
climbing on competitors and driving them down. In the American 
vision of the "Common Wealth," all men would rise together by 
leavening the whole heap at once. A Republic of sovereign States 
would work together for their mutual benefit, improving their collective 
lot by promoting production, science, industry and trade, raising the 
standard of living and the technological practice of all by cooperative 
effort. 8 It was an idealistic reflection of the American dream, which 
assumed the best in people and in human potential. You did not need 
to exploit foreign lands and people in pursuit of "free trade." Like 
Dorothy in The Wizard of Oz, you could find your heart's desire in 
your own backyard. 

That was the vision, but in the sort of negotiated compromise that 
has long characterized politics, it got lost somewhere in the details. 

11 The term "free trade" is used to mean trade between nations unrestricted by 
such things as import duties and trade quotas. Critics say that in more devel- 
oped nations, it results in jobs being "exported" abroad, while in less developed 
nations, workers and the environment are exploited by foreign financiers. 


Chapter 4 - How the Government Was Persuaded 

Hamilton Charters a Bank 

Hamilton argued that to promote the General Welfare, the coun- 
try needed a monetary system that was independent of foreign mas- 
ters; and for that, it needed its own federal central bank. The bank 
would handle the government's enormous war debt and create a stan- 
dard form of currency. Jefferson remained suspicious of Hamilton 
and his schemes, but Jefferson also felt strongly that the new country's 
capital city should be in the South, in his home state of Virginia. 
Hamilton (who did not care where the capital was) agreed on the 
location of the national capital in exchange for Jefferson's agreement 
on the bank. 

When Hamilton called for a tax on whiskey to pay the interest on 
the government's securities, however, he went too far. Jefferson's sup- 
porters were furious. In the type of political compromise still popular 
today, President Washington proposed moving the capital even closer 
to Mt. Vernon. In 1789, Congress passed Hamilton's bill; but the Presi- 
dent still had to sign it. Washington was concerned about the contin- 
ued opposition of Jefferson and the Virginians, who thought the bill 
was unconstitutional. The public would have to use the bank, but the 
bank would not have to serve the public. Hamilton assured the Presi- 
dent that to protect the public, the bank would be required to retain a 
percentage of gold in "reserve" so that it could redeem its paper notes 
in gold or silver on demand. Hamilton was eloquent; and in 1791, 
Washington signed the bill into law. 

The new banking scheme was hailed as a brilliant solution to the 
nation's economic straits, one that disposed of an oppressive national 
debt, stabilized the economy, funded the government's budget, and 
created confidence in the new paper dollars. If the new Congress had 
simply printed its own paper money, speculators would have 
challenged the currency's worth and driven down its value, just as 
they had during the Revolution. To maintain public confidence in the 
national currency and establish its stability, the new Republic needed 
the illusion that its dollars were backed by the bankers' gold, and 
Hamilton's bank successfully met that challenge. It got the country 
up and running, but it left the bank largely in private hands, where it 
could still be manipulated for private greed. Worse, the government 
ended up in debt for money it could have generated itself, indeed should 
have generated itself under the Constitution. 


Web of Debt 

How the Government Wound Up 
Borrowing Its Own Bonds 

The charter for the new bank fixed its total initial capitalization at 
ten million dollars. Eight million were to come from private stock- 
holders and two million from the government. But the government 
did not actually have two million dollars, so the bank (now a char- 
tered lending institution) lent the government the money at interest. 
The bank, of course, did not have the money either. The whole thing 
was sleight of hand. 

The rest of the bank's shares were sold to the public, who bought 
some in hard cash and some in government securities (the I.O.U.s that 
had been issued by the revolutionary government and the States). The 
government had to pay six percent interest annually on all the securities 
now held by the bank - those exchanged for the "loan" of the 
government's own money, plus the bonds accepted by the bank from 
the public. The bank's shareholders were supposed to pay one-fourth 
the cost of their shares in gold; but only the first installment was actually 
paid in hard money, totaling $675,000. The rest was paid in paper 
banknotes. Some came from the Bank of Boston and the Bank of New 
York; but most of this paper money was issued by the new U.S. Bank 
itself and lent back to its new shareholders, through the magic of 
"fractional reserve" lending. 

Within five years, the government had borrowed $8.2 million from 
the bank. The additional money was obviously created out of thin air, 
just as it would have been if the government had printed the money 
itself; but the government now owed principal and interest back to 
the bank. To reduce its debt to the bank, the government was eventu- 
ally forced to sell its shares, largely to British financiers. Zarlenga 
reports that Hamilton, to his credit, Hamilton opposed these sales. 
But the sales went through, and the first Bank of the United States 
wound up largely under foreign ownership and control. 9 


Chapter 4 - How the Government Was Persuaded 

When Political Duels Were Deadly 

Hamilton was widely acclaimed as a brilliant writer, orator and 
thinker; but to Jefferson he remained a diabolical schemer, a British 
stooge pursuing a political agenda for his own ends. The first Bank of 
the United States was modeled on the Bank of England, the same 
private bank against which the colonists had just rebelled. Years later, 
Jefferson would say that Hamilton had tricked him into approving 
the bank's charter. Jefferson had always suspected Hamilton of mo- 
narchical sympathies, and his schemes all seemed tainted with cor- 
ruption. Jefferson would go so far as to tell Washington he thought 
Hamilton was a dangerous traitor. 10 He complained to Madison about 
Hamilton's bookkeeping: 

I do not at all wonder at the condition in which the finances of 
the United States are found. Hamilton's object from the beginning 
was to throw them into forms which should be utterly 
indecipherable. 11 

Hamilton, for his part, thought little better of Jefferson. The feud 
between the two Founding Fathers resulted in the two-party system. 
Hamilton's party, the Federalists, favored a strong central government 
funded by a centralized federal banking system. Jefferson's party, the 
Democratic Republicans or simply Republicans, favored State and in- 
dividual rights. Jefferson's party was responsible for passing the Bill 
of Rights. 12 

Hamilton had worked with Aaron Burr in New York City to es- 
tablish the Manhattan Company, which would eventually become 
the Chase Manhattan Bank. But Hamilton broke with Burr and the 
Boston Federalists when he learned that they were plotting to split the 
northern States from the Union. Hamilton's first loyalty was to the 
Republic. Burr and his faction were working closely with British al- 
lies, who would later try to break up the Union by backing the Con- 
federacy in the Civil War. Hamilton swung his support to Jefferson 
against Burr in the presidential election of 1800, and other patriotic 
Federalists did the same. The Federalist Party ceased to be a major 
national party after the War of 1812, when the Boston Federalists sided 
with England, which lost. 13 

In 1801, Jefferson became President with Hamilton's support, while 
Burr became Vice President. In 1804, when Burr sought the gover- 
norship of New York, he was again defeated largely through 
Hamilton's opposition. In the course of the campaign, Hamilton ac- 


Web of Debt 

cused Burr in a newspaper article of being "a dangerous man" who 
"ought not to be trusted with the reins of government." When 
Hamilton refused to apologize, Burr challenged him to a duel; and at 
the age of 49, Hamilton was dead. 

He remains a controversial figure, but Hamilton earned his place 
in history. He succeeded in stabilizing the shaky new economy and 
getting the country on its feet, and his notions of "monetizing" debt 
and "federalizing" the banking system were major innovations. He 
restored the country's credit, gave it a national currency, made it 
economically independent, and incorporated strong federal provisions 
into the Constitution that would protect and nurture the young country 
according to a uniquely American system founded on "promoting the 
General Welfare." 

Those were his positive contributions, but Hamilton also left a 
darker legacy. Lurking behind the curtain in his new national bank, a 
privileged class of financial middlemen were now legally entitled to 
siphon off a perpetual tribute in the form of interest; and because they 
controlled the money spigots, they could fund their own affiliated 
businesses with easy credit, squeezing out competitors and perpetuating 
the same class divisions that the "American system" was supposed to 
have circumvented. The money power had been delivered into private 
hands; and they were largely foreign hands, the same interests that 
had sought to keep America in a colonial state, subservient to an elite 
class of oligarchical financiers. 

Who were these foreign financiers, and how had they acquired so 
much leverage? The Yellow Brick Road takes us farther back in history, 
back to when the concept of "usury" was first devised .... 


Chapter 5 


"I'm melting! My world! My world! Who would have thought 
a little girl like you could destroy my beautiful wickedness!" 

- The Wicked Witch of the West to Dorothy 

When Frank Baum made his witch-vanquishing hero a 
defenseless young girl, he probably wasn't thinking about 
the gender ramifications of economic systems; but Bernard Lietaer has 
given the subject serious thought. In The Mystery of Money, he traces 
the development of two competing monetary schemes, one based on 
shared abundance, the other based on scarcity, greed and debt. The 
former characterized the matriarchal societies of antiquity. The latter 
characterized the warlike patriarchal societies that forcibly displaced 
them. 1 

The issue wasn't really one of gender, of course, since every society 
is composed half of each. The struggle was between two archetypal 
world views. What Lietaer called the matriarchal and patriarchal 
systems, Henry Clay called the American and British systems - 
cooperative abundance versus competitive greed. But that classification 
isn't really accurate either, or fair to the British people, since their own 
economic conquerors also came from somewhere else, and the British 
succeeded in withstanding the moneylenders' advances for hundreds 
of years. The "American system" devised in the American colonies 
was actually foreshadowed in the tally system of medieval England. 
Lietaer traces this archetypal struggle back much farther than 


Chapter 5 - From Matriarchies of Abundance 

seventeenth century England. He traces it to the cradle of Western 
civilization in ancient Sumer. 

When Money Could Grow 

Located where Iraq is today, Sumer was a matriarchal agrarian 
economy with a financial system based on abundance and shared 
wealth. One of the oldest known bronze coins was the Sumerian 
shekel, dating from 3,200 B.C. It was inscribed with the likeness of 
the Goddess Inanna-Ishtar, who bestowed kingship in Sumer and was 
the goddess of fertility, life and death. Inanna wore the horns of a 
cow, the sacred animal that personified the Great Mother everywhere 
in ancient myth. Hathor, the Egyptian equivalent, had cow ears and 
a human face and was the goddess of love, fertility and abundance. 
Her horn was the "cornucopeia" from which poured the earth's plenty. 
Isis, an even more powerful Egyptian mother figure, was portrayed 
wearing the horns of a cow with the sun disc between them. In India, 
the cow goddess was Kali, for whom cows are sacred to this day. 
Cows were also associated with money, since they were an early me- 
dium of exchange. The Sumerian word for "interest" was the same as 
the word for "calf." It was natural to repay advances of cattle with 
an extra calf, because the unit of exchange itself multiplied over the 
loan period. This was also true for grain, for which the temples served 
as storehouses. Grain advanced over the growing period was repaid 
with extra grain after the harvest, in gratitude to God for multiplying 
the community's abundance. 

The temples were public institutions that also served welfare 
functions, including the support of widows, orphans, the elderly and 
infirm. Temples were endowed with land to provide food for their 
dependent labor, and resources such as herds of sheep to provide wool 
for their workshops. They operated autonomously, supporting 
themselves not through taxation but by renting lands and workshops 
and charging interest on loans. Goods were advanced to traders, who 
returned the value of the goods plus interest. The temples also acted 
as central banks. Sacrificial coins inscribed "debt to the Gods" were 
paid to farmers in acknowledgment that wheat had been contributed 
to the temple. These coins were also lent to borrowers. When interest 
was paid on the loans, it went back to the temple to fund the 
community's economic and social programs and to cover losses from 
bad loans. 2 


Web of Debt 

It was only after the Indo-European invasions of the second mil- 
lennium B.C. that moneylending became the private enterprise of the 
infamous moneychangers. The Goddess Inanna was superseded as 
the source of supreme kingship by the male god Enlil of Nippur, and 
the matriarchal system of shared communal abundance was forcibly 
displaced by a militant patriarchal system. The cornucopia of the 
Horned Goddess became the bull horns of the Thunder God, repre- 
senting masculine power, virility and force. 3 

In the temple system, the community extended credit and received 
the money back with interest. In the system that displaced it, interest 
on debts went into private vaults to build the private fortunes of the 
moneychangers. Interest was thus transformed from a source of income 
for the community into a tool for impoverishing and enslaving people 
and nations. Unlike corn and cows, the gold the moneylenders lent 
was inorganic. It did not "grow," so there was never enough to cover 
the additional interest charges added to loans. When there was 
insufficient money in circulation to cover operating expenses, farmers 
had to borrow until harvest time; and the odd man out in the musical 
chairs of finding eleven coins to repay ten wound up in debtor's prison. 
Historically, most slavery originated from debt. 4 

The Proscription Against Usury 

"Usury" is now defined as charging "excess" interest, but origi- 
nally it meant merely charging a fee or interest for the use of money. 
Usury was forbidden in the Christian Bible, and anti-usury laws were 
strictly enforced by the Catholic Church until the end of the Middle 
Ages. But in Jewish scriptures, which were later joined to the Chris- 
tian books as the "Old Testament," usury was forbidden only between 
"brothers." Charging interest to foreigners was allowed and even 
encouraged.' The "moneychangers" thus came to be associated with 
the Jews, but they were not actually the Jewish people. In fact the 
Jewish people may have suffered more than any other people from 
the moneychangers' schemes, which were responsible for much anti- 
semitism. 5 

1 See Deuteronomy (New World Translation) — 15:6 [Y]ou will certainly lend 
on pledge to many nations, whereas you yourself will not borrow; and you must 
dominate over many nations, whereas over you they will not dominate. 23:19 
You must not make your brother pay interest .... 23:20 You may make a 
foreigner pay interest, but your brother you must not make pay interest. 


Chapter 5 - From Matriarchies of Abundance 

In the informative documentary video The Money Masters, Bill 
Still and Patrick Carmack point out that when Jesus threw the 
moneychangers out of the temple, it was actually to protect the Jew- 
ish people. Half-shekels, the only pure silver coins of assured weight 
without the image of a pagan Emperor on them, were the only coins 
considered acceptable for paying the Temple tax, a tribute to God. 
But half-shekels were scarce, and the moneychangers had cornered 
the market for them. Like the modern banking cartel, they had mo- 
nopolized the medium of exchange and were exacting a charge for its 
use. 6 

Despite the injunctions in the New Testament, there were times 
when the king needed money. In the Middle Ages, England was short 
of gold, which had left during the Crusades. In 1087, when King 
William (Rufus) needed gold to do business with the French, he 
therefore admitted the moneylenders, on condition that the interest 
be demanded in gold and that half be paid to the king. But the 
moneylenders eventually became so wealthy at the expense of the 
people that the Church, with urgings from the Pope, prohibited them 
from taking interest; and in 1290, when they had lost their usefulness 
to the king, most Jews were again expelled from the country. This 
pattern, in which Jews as a people have been persecuted for the 
profiteering of a few and have been used as scapegoats to divert 
attention from the activities of the rulers, has been repeated over the 

Money as a Simple Tally of Accounts 

Meanwhile, England was faced with the problem of what to use 
for money when the country was short of gold. The coinage system 
was commodity-based. It assumed that "money" was something hav- 
ing value in itself (gold or silver), which was bartered or traded for 
goods or services of equal value. But according to Stephen Zarlenga, 
who has traced the origins and history of money in his revealing com- 
pendium The Lost Science of Money, the use of coins as money did 
not originate with merchants trading in the marketplace. The first 
known coins were issued by governments; and their value was the 
value stamped on them, not the price at which the metal traded. 
Zarlenga quotes Aristotle, who said: 

Money exists not by nature but by law. [It acts] as a measure [that] 
makes goods commensurate and equates them. . . . There must 
then be a unit, and that fixed by agreement. 7 


Web of Debt 

Money was a mere fiat of the law. Fiat means "let it be done" in 
Latin. "Fiat money" is money that is legal tender by government decree. 
It is simply a "tally," something representing units of value that can 
be traded in the market, a receipt for goods or services that can legally 
be tendered for other goods or services. In Mandarin China, where 
paper money was invented in the ninth century, this sort of fiat 
currency funded a long and prosperous empire. Fiat money was also 
used successfully in medieval England, but in England it was made of 

The English tally system originated with King Henry I, son of 
William the Conqueror, who took the throne in 1100 A.D. The printing 
press had not yet been invented, and taxes were paid directly with 
goods produced by the land. Under King Henry's innovative system, 
payment was recorded with a piece of wood that had been notched 
and split in half. One half was kept by the government and the other 
by the recipient. To confirm payment, the two halves were matched 
to make sure they "tallied." Since no stick splits in an even manner, 
and since the notches tallying the sums were cut right through both 
pieces of wood, the method was virtually foolproof against forgery. 
The tally system has been called the earliest form of bookkeeping. 
According to historian M. T. Clanchy in From Memory to Written 
Record, England 1066-1307 : 

Tallies were ... a sophisticated and practical record of numbers. 
They were more convenient to keep and store than parchments, 
less complex to make, and no easier to forge. 8 

Only a few hundred tallies survive, Clanchy writes, but millions 
were made. Tallies were used by the government not only as receipts 
for the payment of taxes but to pay soldiers for their service, farmers 
for their wheat, and laborers for their labor. At tax time, the treasurer 
accepted the tallies in payment of taxes. By the thirteenth century, 
the financial market for tallies was sufficiently sophisticated that they 
could be bought, sold, or discounted. Tallies were used by individuals 
and institutions to register debts, record fines, collect rents, and enter 
payments for services rendered. In the 1500s, King Henry VIII gave 
them the force of a national currency when he ordered that tallies 
must be used to evidence the payment of taxes. 9 That meant everyone 
had to have them. In War Cycles, Peace Cycles, Richard Hoskins 
writes that by the end of the seventeenth century, about 14 million 
pounds' worth of tally-money was in circulation. 10 Zarlenga cites a 
historian named Spufford, who said that English coinage had never 


Chapter 5 - From Matriarchies of Abundance 

exceeded half a million pounds up to that time. 11 The tally system 
was thus not a minor monetary experiment, as some commentators 
have suggested. During most of the Middle Ages, tallies may have 
made up the bulk of the English money supply. The tally system was 
in use for more than five centuries before the usury bankers' gold- 
based paper banknotes took root, helping to fund a long era of leisure 
and abundance that flowered into the Renaissance. 

A Revisionist View of the Middle Ages 

Modern schoolbooks generally portray the Middle Ages as a time 
of poverty, backwardness, and economic slavery, from which the 
people were freed only by the Industrial Revolution; but reliable early 
historians painted a quite different picture. Thorold Rogers, a nine- 
teenth century Oxford historian, wrote that in the Middle Ages, "a 
labourer could provide all the necessities for his family for a year by work- 
ing 14 weeks." Fourteen weeks is only a quarter of a year! The rest of 
the time, some men worked for themselves; some studied; some fished. 
Some helped to build the cathedrals that appeared all over Germany, 
France and England during the period, massive works of art that were 
built mainly with volunteer labor. Some used their leisure to visit these 
shrines. One hundred thousand pilgrims had the wealth and leisure 
to visit Canterbury and other shrines yearly. William Cobbett, author 
of the definitive History of the Reformation, wrote that Winchester 
Cathedral "was made when there were no poor rates; when every 
labouring man in England was clothed in good woollen cloth; and 
when all had plenty of meat and bread . . . ." Money was available for 
inventions and art, supporting the Michelangelos, Rembrandts, 
Shakespeares, and Newtons of the period. 12 

The Renaissance is usually thought of as the flowering of the age; 
but the university system, representative government in a Parliament, 
the English common law system, and the foundations of a great liter- 
ary and spiritual movement were all in place by the thirteenth cen- 
tury, and education was advanced and widespread. As one scholar 
of the era observes: 

We are very prone to consider that it is only in our time that 
anything like popular education has come into existence. As a 
matter of fact, however, the education afforded to the people in 
the little towns of the Middle Ages, represents an ideal of 
educational uplift for the masses such as has never been even 
distantly approached in succeeding centuries. The Thirteenth 


Web of Debt 

Century developed the greatest set of technical schools that the 
world has ever known. . . . These medieval towns, . . . during the 
course of the building of their cathedrals, of their public buildings 
and various magnificent edifices of royalty and for the nobility, 
succeeded in accomplishing such artistic results that the world 
has ever since held them in admiration. 13 

The common people had leisure, education, art, and economic 
security. According to The Catholic Encyclopedia : 

Economic historians like Rogers and Gibbins declare that during 
the best period of the Middle Ages - say, from the thirteenth to 
the fifteenth century, inclusive - there was no such grinding 
and hopeless poverty, no such chronic semi-starvation in any 
class, as exists to-day among large classes in the great cities .... 
In the Middle Ages there was no class resembling our proletariat, 
which has no security, no definite place, no certain claim upon 
any organization or institution in the socio-economic organism. 14 

Richard Hoskins attributes this long period of prosperity to the 
absence of usurious lending practices. 15 Rather than having to borrow 
the moneylenders' gold, the people relied largely on interest-free tallies. 
Unlike gold, wooden tallies could not become scarce; and unlike paper 
money, they could not be counterfeited or multiplied by sleight of hand. 
They were simply a unit of measure, a tally of goods and services 
exchanged. The tally system avoided both the depressions resulting 
from a scarcity of gold and the inflations resulting from printing paper 
money out of all proportion to the goods and services available for 
sale. Since the tallies came into existence along with goods and services, 
supply and demand increased together, and prices remained stable. 
The tally system provided an organic form of money that expanded 
naturally as trade expanded and contracted naturally as taxes were 
paid. Bankers did not have to meet behind closed doors to set interest 
rates and manipulate markets to keep the money supply in balance. It 
balanced the way a checkbook balances, as a matter of simple math. 
The system of government-issued tallies kept the British economy stable 
and thriving until the mid-seventeenth century, when Oliver Cromwell, 
the "Pretender," needed money to fund a revolt against the Tudor 
monarchy .... 


Chapter 6 


"Oz is a Great Wizard, and can take any form he wishes. . . . But 
who the real Oz is, when he is in his own form, no living person can 

- The Wonderful Wizard ofOz, 
"The Guardian of the Gates" 

The image of puppet and puppeteer has long been a popular 
metaphor for describing the Money Power pulling the strings 
of government. Benjamin Disraeli, British Prime Minister from 1868 
to 1880, said, "The world is governed by very different personages 
from what is imagined by those who are not behind the scenes." 
Nathan Rothschild, who controlled the Bank of England after 1820, 
notoriously declared: 

I care not what puppet is placed upon the throne of England to 
rule the Empire on which the sun never sets. The man who controls 
Britain's money supply controls the British Empire, and I control the 
British money supply. 

In the documentary video The Money Masters, narrator Bill Still 
uses the puppet metaphor to describe the transfer of power from the 
royal line of English Stuarts to the German royal House of Hanover in 
the eighteenth century: 

England was to trade masters: an unpopular King James II for a 
hidden cabal of Money Changers pulling the strings of their 


Chapter 6 - Pulling the Strings of the King 

usurper, King William III, from behind the scenes. This symbiotic 
relationship between the Money Changers and the higher British 
aristocracy continues to this day. The monarch has no real power 
but serves as a useful shield for the Money Changers who rule 
the City .... In its 20 June 1934 issue, New Britain magazine of 
London cited a devastating assertion by former British Prime 
Minister David Lloyd George, that "Britain is the slave of an 
international financial bloc." 1 

Where did these international financiers come from, and how had 
they achieved their enormous power? The moneylenders had been 
evicted not only from England but from other European countries. 
They had regrouped in Holland, where they plotted their return; but 
the English kings and queens staunchly resisted their advances. The 
king did not need to borrow money when he had the sovereign right 
to issue it himself. For a brief period in the 1500s, King Henry VIII 
relaxed the laws concerning usury when he broke away from the 
Catholic Church; but when Queen Mary took the throne, she tight- 
ened the laws again. The result was to seriously contract the money 
supply, but Queen Elizabeth I (Mary's half-sister) was determined to 
avoid the usury trap. She solved the problem by supplementing the 
money supply with metal coins issued by the public treasury. 2 

The coins were made of metal, but their value came from the stamp 
of the sovereign on them. This was established as a matter of legal 
precedent in 1600, when Queen Elizabeth issued relatively worthless 
base metal coins as legal tender in Ireland. All other coins were 
annulled and had to be returned to the mints. When the action was 
challenged in the highest court of the land, the court ruled that it was 
the sovereign's sole prerogative to create the money of the realm. What 
the sovereign declared to be money was money, and it was treason for 
anyone else to create it. Zarlenga states that this decision was so detested 
by the merchant classes, the goldsmiths, and later the British East India 
Company that they worked incessantly to destroy it. According to 
Alexander Del Mar, writing in 1895: 

This was done by undermining the Crown and then passing the 
free coinage act of 1666, opening the way for the foreign element 
to establish a new Monarch, and to reconstitute the money 
prerogative in the hands of a specific group of financiers - not 
elected, not representing society, and in large part not even 
English. 3 


Web of Debt 

Britain thrived with government-issued currency (tallies and coins) 
until the king's sovereign authority was eroded by Cromwell's revolt 
in the mid-seventeenth century. The middle classes (the traders, 
manufacturers and small farmers) sided with Parliament under 
Cromwell, who was a Puritan Protestant. The nobles and gentry sided 
with the King — Charles I, son of James I, who followed the Church of 
England, the English Catholic Church. The Protestants were more 
lenient than the Catholics toward usury and toward the Dutch 
moneylenders who practiced it. The moneylenders agreed to provide 
the funds to back Parliament, on condition that they be allowed back 
into England and that the loans be guaranteed. That meant the 
permanent removal of King Charles, who would have repudiated the 
loans had he gotten back into power. Charles' recapture, trial, and 
execution were duly arranged and carried out to secure the loans. 4 

After Cromwell's death, Charles' son Charles II was invited to 
return; but Parliament had no intention of granting him the sovereign 
power over the money supply enjoyed by his predecessors. When the 
king needed a standing army, Parliament refused to vote the funds, 
forcing him to borrow instead from the English goldsmiths at usurious 
interest rates. The final blow to the royal prerogative was the Free 
Coinage Act of 1666, which allowed anyone to bring gold or silver to 
the mint to have it stamped into coins. The power to issue money, 
which had for centuries been the sole right of the king, was transferred 
into private hands, giving bankers the power to cause inflations and 
depressions at will by issuing or withholding their gold coins. 5 

None of the earlier English kings or queens would have agreed to 
charter a private central bank that had the power to create money 
and lend it to the government. Since they could issue money them- 
selves, they had no need for loans. But King William III, who fol- 
lowed Charles II, was a Dutchman and a tool of the powerful 
Wisselbank of Amsterdam .... 


Chapter 6 - Pulling the Strings of the King 

A Dutch-bred King Charters the Bank of England 
on Behalf of Foreign Moneylenders 

The man who would become King William III began his career as 
a Dutch aristocrat. He was elevated to Captain General of the Dutch 
Forces and then to Prince William of Orange with the backing of Dutch 
moneylenders. His marriage was arranged to Princess Mary of York, 
eldest daughter of the English Duke of York, and they were married 
in 1677. The Duke, who was next in line to be King of England, died 
in 1689, and William and Mary became King and Queen of England. 

William was soon at war with Louis XIV of France. To finance his 
war, he borrowed 1.2 million pounds in gold from a group of money- 
lenders, whose names were to be kept secret. The money was raised 
by a novel device that is still used by governments today: the lenders 
would issue a permanent loan on which interest would be paid but the prin- 
cipal portion of the loan would not be repaid. 6 The loan also came with 
other strings attached. They included: 

(1) The lenders were to be granted a charter to establish a Bank of 
England, which would issue banknotes that would circulate as the 
national paper currency. 

(2) The Bank would create banknotes out of nothing, with only a 
fraction of them backed by coin. Banknotes created and lent to the 
government would be backed mainly by government I.O.U.s, which 
would serve as the "reserves" for creating additional loans to private 

(3) Interest of 8 percent would be paid by the government on its 
loans, marking the birth of the national debt. 

(4) The lenders would be allowed to secure payment on the na- 
tional debt by direct taxation of the people. Taxes were immediately 
imposed on a whole range of goods to pay the interest owed to the 
Bank. 7 

The Bank of England has been called "the Mother of Central Banks." 
It was chartered in 1694 to William Paterson, a Scotsman who had 
previously lived in Amsterdam. 8 A circular distributed to attract 
subscribers to the Bank's initial stock offering said, "The Bank hath 
benefit of interest on all moneys which it, the Bank, creates out of nothing." 9 
The negotiation of additional loans caused England's national debt to 
go from 1.2 million pounds in 1694 to 16 million pounds in 1698. By 
1815, the debt was up to 885 million pounds, largely due to the 


Web of Debt 

compounding of interest. The lenders not only reaped huge profits, 
but the indebtedness gave them substantial political leverage. 

The Bank's charter gave the force of law to the "fractional reserve" 
banking scheme that put control of the country's money in a privately 
owned company. The Bank of England had the legal right to create 
paper money out of nothing and lend it to the government at interest. 
It did this by trading its own paper notes for paper bonds represent- 
ing the government's promise to pay principal and interest back to the 
Bank — the same device used by the U.S. Federal Reserve and other 
central banks today. 

The Tally System Goes the Way of the Witches 

After the Bank of England began issuing paper banknotes in the 
1690s, the government followed suit by issuing paper tallies against 
future tax revenues. Paper was easily negotiable, making the paper 
tallies competitive with private banknote money. For the next cen- 
tury, banknotes and tallies circulated interchangeably; but they were 
not mutually compatible means of exchange. The bankers' paper 
money expanded when credit expanded and contracted when loans 
were canceled or "called," producing cycles of "tight" money and 
depression alternating with "easy" money and inflation. Yet these 
notes appeared to be more sound than the government's tallies, be- 
cause they were "backed" by gold. They appeared to be sound until a 
bank's customers got suspicious and all demanded their gold at the 
same time, when there would be a run on the bank and it would have 
to close its doors because it did not have enough gold to go around. 
Meanwhile, the government tallies were permanent money that re- 
mained stable and fixed. They made the bankers' paper money look 
bad, and they had to go. 

The tallies had to go for another reason. King William's right to 
the throne was disputed, and the Dutch moneylenders who backed 
him could be evicted if the Catholics got back in and forbade 
moneylending again. To make sure that did not happen, the 
moneylenders used their new influence to discount the tallies as money 
and get their own banknotes legalized as the money of the realm. The 
tallies were called "unfunded" debt, while the Bank of England's paper 
notes were euphemistically labeled "funded" debt. Modern economic 
historians call this shift a "Financial Revolution." According to a 
scholarly article published at Harvard University in 2002, "Tallies and 


Chapter 6 - Pulling the Strings of the King 

departmental bills were issued to creditors in anticipation of annual 
tax revenues but were not tied to any specific revenue streams; hence 
they were 'unfunded.'" When debt was "funded," on the other hand, 
"Parliament set aside specific revenues to meet interest payments, a 
feature that further enhanced confidence in lending to the 

What seems to have been overlooked is that until the mid- 
seventeenth century, the tallies did not need to be "funded" through 
taxes, since they were not debts. They were receipts for goods and 
services, which could be used by the bearers in the payment of taxes. It 
was because the tallies were accepted and sometimes even required in 
the payment of taxes that they retained a stable value as money. Before 
Cromwell's Revolution, the king did not need to borrow, because he could 
issue metal coins or wooden tallies at will to pay his bills. The Harvard 
authors present a chart showing that in 1693, 100 percent of the 
government's debt was "unfunded" (or paid in government tallies). 
"By the 1720s," they wrote, "over 90 percent of all government 
borrowing was long term and funded. This, in a nutshell, was the 
Financial Revolution." 10 In a nutshell, the "Financial Revolution" 
transferred the right to issue money from the government to private bankers. 

In the end, the tallies met the same fate as the witches - death by 
fire. The medieval "witches" were mainly village healers, whose natu- 
ral herbs and potions competed with the male-dominated medical pro- 
fession and papal church. According to some modern estimates, nine 
million women were executed as witches for practicing natural herbal 
medicine and "occult" religion. 11 The tallies were similarly the money 
of the people, which competed with the money of the usury bankers. 
In 1834, after the passage of certain monetary reform acts, the tally 
sticks went up in flames in a huge bonfire started in a stove in the 
House of Lords. In an ironic twist, the fire quickly got out of control, 
and wound up burning down both the Palace of Westminster and the 
Houses of Parliament. It was symbolic of the end of an equitable era 
of trade, with the transfer of power from the government to the Bank. 12 


Web of Debt 

John Law Proposes a National Paper Money Supply 

Popular acceptance of the bankers' privately-issued money scheme 
is credited to the son of a Scottish goldsmith named John Law, who 
has been called "the father of finance." In 1705, Law published a 
series of pamphlets on trade, money and banking, in which he claimed 
to have found the true "Philosopher's Stone," referring to a mythical 
device used by medieval alchemists to turn base material into gold. 
Paper could be converted into gold, Law said, through the alchemy of 
paper money. He proposed the creation of a national paper money 
supply consisting of banknotes redeemable in "specie" (hard currency 
in the form of gold or silver coins), which would be officially recognized 
as money. Paper money could be expanded indefinitely and was much 
cheaper to make than coins. To get public confidence, Law suggested 
that a certain fraction of gold should be kept on hand for the few 
people who actually wanted to redeem their notes. The goldsmiths 
had already established through trial and error that specie could 
support about ten times its value in paper notes. Thus a bank holding 
$10 in gold could safely print and lend about $100 in paper money. 13 
This was the "secret" that the Chicago Federal Reserve said was 
discovered by the goldsmiths: a bank could lend about ten times as 
much money as it actually had, because a trusting public, assuming 
their money was safely in the bank, would not come to collect more 
than about 10 percent of it at any one time. (See Chapter 2.) 

Law planned to open a National Bank in Scotland on the model of 
the Bank of England; but William Paterson, who held the charter for 
the Bank of England, had the plan halted in the Scottish Parliament. 
Law then emigrated to France. He had another reason for leaving the 
country. Notorious for escapades of all sorts, he had gotten into a 
duel over a woman, which he had won; but he had wound up with a 
murder conviction in England. In France, Law was able to put his 
banking theories into practice, when the French chose him to head 

1 A Ponzi scheme is a form of pyramid scheme in which investors are paid with 
the money of later investors. Charles Ponzi was an engaging Boston ex-convict 
who defrauded investors out of $6 million in the 1920s, in a scheme in which he 
promised them a 400 percent return on redeemed postal reply coupons. For a 
while, he paid earlier investors with the money of later investors; but eventually 
he just collected without repaying. The scheme earned him ten years in jail. 


Chapter 6 - Pulling the Strings of the King 

the "Banque Generale" in 1716. Like the Bank of England, it was a 
private bank chartered by the government for the purpose of creating 
money in the form of paper notes. 

It was also in France that Law implemented his most notorious 
"Ponzi scheme."' The "Mississippi bubble" involved the exchange of 
a significant portion of French government debt for shares in a com- 
pany that had a monopoly on trade with French Louisiana. The ven- 
ture was called a "bubble" because most of the company's shares were 
bought on credit. In a huge speculative run, the shares went from 
about 500 French livres in 1719 to 10,000 livres by February 1720. 
They dropped back to 500 livres in September 1721. When the mania 
ended, the investors were completely broke; and Law was again on 
the run. 

The Mississippi bubble was short-lived because it was recognized 
as a sham as soon as more investors demanded payment than there 
were funds to pay them. Law's more enduring Ponzi scheme was the 
one that escaped detection, the "Philosopher's Stone" by which a 
national money supply could be created from government debt that 
had been "monetized," or turned into paper money by private bankers. 
The reason this sleight of hand never got detected was that the central bank 
never demanded the return of its principal. If the bankers had demanded 
the money back, the government would have had to levy taxes, rousing 
the people and revealing what was up the wizard's sleeve. But the 
wily bankers just continued to roll over the debt and collect the interest, 
on a very lucrative investment that paid (and continues to pay) like a 
slot machine year after year. 

This scheme became the basis of the banking system known as 
"central banking," which remains in use today. A private central 
bank is chartered as the nation's primary bank and lends to the na- 
tional government. It lends the central bank's own notes (printed 
paper money), which the government swaps for bonds (its promises 
to pay) and circulates as a national currency. The government's debt 
is never paid off but is just rolled over from year to year, becoming the 
basis of the national money supply. 

Until the twentieth century, banks followed the model of the gold- 
smiths and literally printed their own supply of notes against their 
own gold reserves. These were then multiplied many times over on 
the "fractional reserve" system. The bank's own name was printed 
on the notes, which were lent to the public and the government. To- 
day, federal governments have taken over the printing; but in most 
countries the notes are still drawn on private central banks. In the 


Web of Debt 

United States, they are printed by the U.S. Bureau of Engraving and 
Printing at the request of the Federal Reserve, which "buys" them for 
the cost of printing them and calls them "Federal Reserve Notes." 14 
Today, however, there is no gold on "reserve" for which the notes can 
be redeemed. Like the illusory ghosts in the Haunted House at 
Disneyland, the dollar is the fractal of a hologram, the reflection of a 
debt for something that does not exist. 

The Tallies Leave Their Mark 

Although the tallies were wiped off the books and fell down the 
memory hole, they left their mark on the modern financial system. 
The word "stock," meaning a financial certificate, comes from the 
Middle English for the tally stick. Much of the stock in the Bank of 
England was originally purchased with tally sticks. The holder of the 
stock was said to be the "stockholder," who owned "bank stock." 
One of the original stockholders purchased his shares with a stick 
representing £25,000, an enormous sum at the time. A substantial 
share of what would become the world's richest and most powerful 
corporation was thus bought with a stick of wood! According to 
legend, the location of Wall Street, the New York financial district, 
was chosen because of the presence of a chestnut tree enormous enough 
to supply tally sticks for the emerging American stock market. 

Stock issuance was developed during the Middle Ages, as a way 
of financing businesses when usury and interest-bearing loans were 
forbidden. In medieval Europe, banks run by municipal or local 
governments helped finance ventures by issuing shares of stock in them. 
These municipal banks were large, powerful, efficient operations that 
fought the moneylenders' private usury banks tooth and nail. The 
usury banks prevailed in Europe only when the revolutionary 
government of France was forced to borrow from the international 
bankers to finance the French Revolution (1789-1799), putting the 
government heavily in their debt. 

In the United States, the usury banks fought for control for two 
centuries before the Federal Reserve Act established the banks' private 
monopoly in 1913. Today, the U.S. banking system is not a topic of 
much debate; but in the nineteenth century, the fight for and against 
the Bank of the United States defined American politics. And that 
brings us back to Jefferson and his suspicions of foreign meddling . . . 


Chapter 7 


The Scarecrow and the Tin Woodman, not being made of flesh, were 
not troubled by the scent of the flowers. "Run fast," said the Scarecrow 
to the Lion. "Get out of this deadly flower bed as soon as you can. We 
will bring the little girl with us, but if you should fall asleep you are too 
big to be carried." 

- The Wonderful Wizard ofOz, 
"The Deadly Poppy Field" 

The foreign moneylenders who had conquered Britain set 
the same debt traps in America, and they did it by the same 
means: they provoked a series of wars. British financiers funded the 
opposition to the American War for Independence, the War of 1812, 
and both sides of the American Civil War. In each case, war led to 
inflation, heavy government debt, and the chartering of a private 
"Bank of the United States" to fund the debt, delivering the power to 
create money to private interests. In each case, opposition to the bank 
was opposed by a few alert leaders. Opposition to the First U.S. Bank 
was led by Thomas Jefferson, the country's third President; while op- 
position to the Second U.S. Bank was led by Andrew Jackson, the 
country's seventh President. The two leaders did not have much else 
in common — Jefferson was of the landed gentry, while Jackson was 
called the "roughshod President" — but they shared a deep suspicion 
of any private arrangement for issuing the national currency. Both 
were particularly concerned that the nation's banking system had 


Chapter 7 - While Congress Dozes in the Poppy Fields 

fallen into foreign hands. Jefferson is quoted as saying: 

If the American people ever allow the banks to control the 
issuance of their currency, first by inflation and then by deflation, 
the banks and corporations that will grow up around them will 
deprive the people of all property, until their children will wake 
up homeless on the continent their fathers occupied. 

A similar wakeup call is attributed to Jackson, who told Congress 
in 1829: 

If the American people only understood the rank injustice of 
our money and banking system, there would be a revolution 
before morning. 

Jefferson was instrumental in Congress's refusal to renew the 
charter of the first U.S. Bank in 1811. When the Bank was liquidated, 
Jefferson's suspicions were confirmed: 18,000 of the Bank's 25,000 
shares were owned by foreigners, mostly English and Dutch. The 
foreign domination the Revolution had been fought to eliminate had 
crept back in through the country's private banking system. 
Congressman Desha of Kentucky, speaking in the House of 
Representatives, declared that "this accumulation of foreign capital 
was one of the engines for overturning civil liberty," and that he had 
"no doubt King George III was a principal stockholder." 1 

When Congress later renewed the Bank's charter, Andrew Jackson 
vetoed it. He too expressed concern that a major portion of the Bank's 
shareholders were foreigners. He said in his veto bill: 

Is there no danger to our liberty and independence in a bank 
that in its nature has so little to bind it to our country? ... Of the 
course which would be pursued by a bank almost wholly owned 
by the subjects of a foreign power, . . . there can be no doubt. . . 
Controlling our currency, receiving our public monies, and 
holding thousands of our citizens in dependence, it would be more 
formidable and dangerous than a naval and military power of the 

Who were these "subjects of a foreign power" who owned the 
bank? In The History of the Great American Fortunes, published in 
1936, Gustavus Myers pointed to the formidable British banking dy- 
nasty the House of Rothschild. Myers wrote: 

Under the surface, the Rothschilds long had a powerful influence 
in dictating American financial laws. The law records show 
that they were the power in the old Bank of the United States. 2 


Web of Debt 

Return of the King's Bankers 

Like the German Hanoverian kings, the Rothschild banking em- 
pire was British only in the sense that it had been in England for a 
long time. Its roots were actually in Germany. The House of Rothschild 
was founded in Frankfurt in the mid-eighteenth century, when a 
moneylender named Mayer Amschel Bauer changed his name to 
Amschel Rothschild and fathered ten children. His five sons were 
sent to the major capitals of Europe to open branches of the family 
banking business. Nathan, the most astute of these sons, went to Lon- 
don, where he opened the family branch called N. M. Rothschild & 
Sons. Nathan's brothers managed N. M. Rothschild's branches in Paris, 
Vienna, Berlin and Naples. 

The family fortunes got a major boost in 1815, when Nathan pulled 
off the mother of all insider trades. He led British investors to believe 
that the Duke of Wellington had lost to Napoleon at the Battle of 
Waterloo. In a matter of hours, British government bond prices plum- 
meted. Nathan, who had advance information, then swiftly bought 
up the entire market in government bonds, acquiring a dominant hold- 
ing in England's debt for pennies on the pound. Over the course of 
the nineteenth century, N. M. Rothschild would become the biggest 
bank in the world, and the five brothers would come to control most 
of the foreign-loan business of Europe. "Let me issue and control a 
nation's money," Nathan Rothschild boasted in 1838, "and I care not 
who writes its laws." 3 

In 1811, when the U.S. Congress declined to renew the charter of 
the first U.S. Bank, Nathan Rothschild already possessed substantial 
political clout in England and was lending money to the U.S. 
government and certain States. "Either the application for renewal of 
the Charter is granted," he is reported to have threatened, "or the 
United States will find itself in a most disastrous war." 4 When the 
charter was not granted, the United States did find itself in another 
war with England, the War of 1812. 

War again led to inflation and heavy government debt. This and 
an inability to collect taxes were the reasons given for chartering the 
Second Bank of the United States as a private national bank. The 
twenty-year charter was signed by President James Madison in 1816. 
It authorized the Bank and its branches to issue the nation's money in 
the form of bank notes, again shifting the power to create the national 
money supply into private hands. 


Chapter 7 - While Congress Dozes in the Poppy Fields 

Jefferson Realizes Too Late the Need for a 
National Paper Currency Issued by the Government 

Jefferson was out of town when the Constitution was drafted, serv- 
ing as America's minister to France during the dramatic period lead- 
ing up to the French Revolution. But even if he had been there, he 
would probably have gone along with the majority and voted to omit 
paper money from the Constitution. After watching the national debt 
mushroom, he wrote to John Taylor in 1798, "I wish it were possible 
to obtain a single amendment to our constitution . . . taking from the 
federal government the power to borrow money. I now deny their 
power of making paper money or anything else a legal tender." 5 

It would be several decades before Jefferson realized that the vil- 
lain was not paper money itself. It was private debt masquerading as 
paper money, a private debt owed to bankers who were merely "pre- 
tending to have money." Jefferson wrote to Treasury Secretary Gallatin 
in 1815: 

The treasury, lacking confidence in the country, delivered itself 
bound hand and foot to bold and bankrupt adventurers and bankers 
pretending to have money, whom it could have crushed at any moment. 

Jefferson wrote to John Eppes in 1813, "Although we have so fool- 
ishly allowed the field of circulating medium to be filched from us by private 
individuals, I think we may recover it ... . The states should be asked to 
transfer the right of issuing paper money to Congress, in perpetuity." He 
told Eppes, "the nation may continue to issue its bills [paper notes] as 
far as its needs require and the limits of circulation allow. Those limits 
are understood at present to be 200 millions of dollars." 6 

Writing to Gallatin in 1803, Jefferson said of the private national 
bank, "This institution is one of the most deadly hostility against the 
principles of our Constitution .... [S]uppose a series of emergencies 
should occur .... [A]n institution like this ... in a critical moment 
might overthrow the government." He asked, "Could we start toward 
independently using our own money to form our own bank?" 

The Constitution gave Congress the power only to "coin money," 
but Jefferson argued that Constitutions could be amended. He wrote 
to Samuel Kercheval in 1816: 

Some men look at constitutions with sanctimonious reverence, 
and deem them like the ark of the Covenant, too sacred to be 
touched. They ascribe to the men of the preceding age a wisdom 


Web of Debt 

more than human, and suppose what they did to be beyond 
amendment . . . [L]aws and institutions must go hand in hand 
with the progress of the human mind. . . . [A]s that becomes 
more developed, more enlightened, as new discoveries are made, 
institutions must advance also, to keep pace with the times. . . . 
We might as well require a man to wear still the coat which 
fitted him when a boy as civilized society to remain forever under 
the regimen of their barbarous ancestors. 7 

During the congressional debates over a Second U.S. Bank, Sena- 
tor John Calhoun proposed a plan for a truly "national" bank along 
the lines suggested by Jefferson. A wholly government-owned na- 
tional bank could issue the nation's own credit directly, without hav- 
ing to borrow from a private bank that issued it. This plan was later 
endorsed by Senator Henry Clay, but it would be several more de- 
cades before the Civil War would provide the pretext for Abraham 
Lincoln to authorize Congress to issue its own money. The Second 
U.S. Bank chartered in 1816 was 80 percent privately owned. 8 

Jackson Battles the Hydra-headed Monster 

Andrew Jackson was a hero of the War of 1812 and a leader with 
enormous popular appeal. He was the first of the "unlettered Scare- 
crows" to reach the White House, to be followed by the even mightier 
Abraham Lincoln (who actually looked like a Scarecrow). Jackson 
received an honorary degree from Harvard College in 1833, but it was 
over the objection of Harvard alumnus John Quincy Adams, who called 
him "a barbarian who could not write a sentence of grammar and 
hardly could spell his own name." Perhaps; but "Old Hickory" truly 
believed in the will of the democratic majority, and he spoke to the 
common people in a way they could understand. 

After the Federalists ceased to be a major national party, the Demo- 
cratic-Republicans dominated the political scene alone for a time. In 
1824, four candidates ran for President as Democratic-Republicans 
from different States: Andrew Jackson, John Quincy Adams, William 
Crawford, and Henry Clay. Jackson easily won the popular vote, but 
he did not have enough electoral votes to win the Presidency, so the 
matter went to the House of Representatives, where Clay threw his 
support to Adams, who won. But popular sentiment remained with 
Jackson, who won by a wide margin against Adams in the election of 


Chapter 7 - While Congress Dozes in the Poppy Fields 

Jackson believed in a strong Presidency and a strong union. He 
stood up to the bankers on the matter of the bank, which he viewed as 
operating mainly for the upper classes at the expense of working people. 
He warned in 1829: 

The bold efforts the present bank has made to control the 
government are but premonitions of the fate that awaits the 
American people should they be deluded into a perpetuation of 
this institution or the establishment of another like it. 

Whether Congress itself had the right to issue paper money, Jack- 
son said, was not clear; but "If Congress has the right under the Con- 
stitution to issue paper money, it was given them to be used by them- 
selves, not to be delegated to individuals or to corporations." His grim 
premonitions about the Bank appeared to be confirmed, when mis- 
management under its first president led to financial disaster, depres- 
sion, bankruptcies, and unemployment. But the Bank began to flour- 
ish under its second president, Nicholas Biddle, who petitioned Con- 
gress for a renewal of its charter in 1832. Jackson, who was then up 
for re-election, expressed his views to this bid in no uncertain terms. 
"You are a den of vipers and thieves," he railed at a delegation of 
bankers discussing the Bank Renewal Bill. "I intend to rout you out, 
and by the eternal God, I will rout you out." He called the bank "a 
hydra-headed monster eating the flesh of the common man." He 
swore to do battle with the monster and to slay it or be slain by it. 9 

In the 1832 election, Jackson ran on the Democratic Party ticket 
against Henry Clay, whose party was now called the National 
Republican Party. Its members considered themselves "nationalists" 
because they saw the country as a nation rather than a loose 
confederation of States, and because they promoted strong nation- 
building measures such as the construction of inter-state roads. Clay 
advocated a strongly protectionist platform that kept productivity and 
financing within the country, allowing it to grow up "in its own 
backyard," free from economic attack from abroad. It was Clay who 
first called this approach the "American system" to distinguish it from 
the "British system" of "free trade." The British system was supported 
by Jackson and opposed by Clay, who thought it would open the 
country to exploitation by foreign financiers and industrialists. To 
prevent that, Clay advocated a tariff favoring domestic industry, 
congressionally-financed national improvements, and a national bank. 

More than three million dollars were poured into Clay's campaign, 
then a huge sum; but Jackson again won by a landslide. He had the 


Web of Debt 

vote of the people but not of Congress, which proceeded to pass the 
Bank Renewal Bill. Jackson as promptly vetoed it. Showing how 
eloquent the self-taught could be, he said in his veto bill: 

There are no necessary evils in government. Its evils exist only 
in its abuses. If it would confine itself to equal protection, and, 
as Heaven does its rains, shower its favor alike on the high and 
the low, the rich and the poor, it would be an unqualified blessing. 
In the act before me there seems to be a wide and unnecessary 
departure from these just principles. Many of our rich men have 
not been content with equal protection and equal benefits, but 
have besought us to make them richer by act of Congress. ... If 
we can not at once, in justice to interests vested under 
improvident legislation, make our Government what it ought to 
be, we can at least take a stand against all new grants of 
monopolies and exclusive privileges, against any prostitution of 
our Government to the advancement of the few at the expense 
of the many .... 

Jackson succeeded in vetoing the bill, but he knew that his battle 
with the Bank was just beginning. "The hydra of corruption is only 
scotched, not dead," he exclaimed. Boldly taking the hydra by the 
horns, he ordered his new Treasury Secretary to start transferring the 
government's deposits from the Second U.S. Bank into state banks. 
When the Secretary refused, Jackson fired him and appointed another. 
When that Secretary refused, Jackson appointed a third. When the 
third Secretary proceeded to do as he was told, Jackson was trium- 
phant. "I have it chained," he said of the banking monster. "I am 
ready with screws to draw every tooth and then the stumps." But 
Biddle and his Bank were indeed only scotched, not dead. Biddle 
used his influence to get the Senate to reject the new Secretary's nomi- 
nation. Then he threatened to cause a national depression if the Bank 
were not rechartered. Biddle openly declared: 

Nothing but widespread suffering will produce any effect on Congress. 
. . . Our only safety is in pursuing a steady course of firm 
[monetary] restriction - and I have no doubt that such a course 
will ultimately lead to restoration of the currency and the re- 
charter of the Bank. 

Biddle proceeded to make good on his threat by sharply contract- 
ing the money supply. Old loans were called in and new ones were 
refused. A financial panic ensued, followed by a deep economic de- 
pression. Biddle blamed it all on Jackson, and the newspapers picked 


Chapter 7 - While Congress Dozes in the Poppy Fields 

up the charge. Jackson was officially censured by a Senate resolution. 
The tide turned, however, when the Governor of Pennsylvania (where 
the Bank was located) came out in support of the President and strongly 
critical of the Bank; and Biddle was caught boasting in public about 
the Bank's plan to crash the economy. In April 1834, the House of 
Representatives voted 134 to 82 against re-chartering the Bank, and a 
special committee was established to investigate whether it had caused 
the crash. 10 

In January 1835, in what may have been his finest hour, Jackson 
paid off the final installment on the national debt. He had succeeded 
in doing something that had never been done before and has not been 
done since: he reduced the national debt to zero and accumulated a 
surplus.' The following year, the charter for the Second Bank of the 
United States expired; and Biddle was later arrested and charged with 
fraud. He was tried and acquitted, but he died while tied up in civil 

Jackson had beaten the Bank. His personal secretary, Nicholas 
Trist, called it "the crowning glory of A.J.'s life and the most impor- 
tant service he has ever rendered his country." The Boston Post com- 
pared it to Jesus throwing the moneychangers out of the Temple. But 
Jackson, like Jesus, found that taking on the moneychangers was risky 
business. "The Bank is trying to kill me," he said, "but I will kill it!" 
He was the victim of an assassination attempt, but both the assassin's 
shots missed. 11 

Abraham Lincoln would not be so lucky .... 

' Recall that President Clinton's balancing of the budget did not include 
paying off the national debt, which stood at $5 trillion in 2000. 


Chapter 8 

"With the thoughts you'd be thinkin', 
"You could be another Lincoln, 
"If you only had a brain 

- Dorothy to the Scarecrow (1939 film) 

Like the Scarecrow who wound up ruling Oz, Abraham 
Lincoln went from hayseed to the top of his class by sheer 
native wit and determination, epitomizing the American dream. Fol- 
lowing in the footsteps of Andrew Jackson, he rose from the back- 
woods to the Presidency without ever going to college. Lincoln's 
mother could barely read. Like Jackson, Lincoln risked life and limb 
battling the Money Power; but the two Presidents had quite different 
ideas about how it should be done. Jackson had captured the popular 
imagination by playing on the distrust of big banks and foreign bank- 
ers; but in throwing out the national bank and its foreign controllers, 
he had thrown out Hamilton's baby with the bath water, leaving the 
banks in unregulated chaos. There was now no national currency. 
Banks printed their own notes and simply had to be trusted to redeem 
them in specie (or gold bullion). When trust faltered, there would be a 
run on the bank and the bank would generally wind up closing its 
doors. Bank-fed speculation had collapsed much of the factory sys- 
tem; and federal support for road, canal and railway construction 
was halted, halting the pioneer settlement of the West along with it. 

Lincoln was only 24 when he joined the fight as an Illinois state 
legislator to continue the pioneering internal improvements begun by 
Henry Clay and the National Republicans. The National Republicans 
were now called "Whigs" after the British Whigs, the party in opposi- 
tion to the King. Jackson had taken such unprecedented powers to 


Chapter 8 - Scarecrow with a Brain 

himself that he had come to be called "King Andrew," making the 
American opposition party Whigs by extension. The "Illinois Improve- 
ment Program" of Lincoln's home state centered on construction of 
the Illinois-Michigan canal and a 3,000-mile railroad system. The re- 
sult was an unbroken transportation line from the Hudson River to 
the Great Lakes and the Mississippi River. Lincoln also joined the 
movement to restore the country's financial, industrial and political 
independence by restoring a national bank and a national currency. 1 

When the Whig Party disintegrated over the question of slavery, 
Lincoln joined the Republican Party, which was created in 1854 to 
oppose the expansion of slavery into Kansas. It opposed the political 
control exerted by southern slave owners over the national government; 
maintained that free-market labor was superior to slavery; promised 
free homesteads to farmers; and advanced a progressive vision 
emphasizing higher education, banking, railroads, industry and cities. 2 
Lincoln became the first Republican candidate to be elected President. 

Both Jackson and Lincoln were targets of assassination attempts, 
but for Lincoln they started before he was even inaugurated. He had 
to deal with treason, insurrection, and national bankruptcy within 
the first days of taking office. Considering the powerful forces arrayed 
against him, his achievements in the next four years were nothing 
short of phenomenal. His government built and equipped the largest 
army in the world, smashed the British-financed insurrection, abolished 
slavery, and freed four million slaves. Along the way, the country 
managed to become the greatest industrial giant the world had ever 
seen. The steel industry was launched, a continental railroad system 
was created, the Department of Agriculture was established, a new 
era of farm machinery and cheap tools was promoted, a system of 
free higher education was established through the Land Grant College 
System, land development was encouraged by passage of a Homestead 
Act granting ownership privileges to settlers, major government 
support was provided to all branches of science, the Bureau of Mines 
was organized, governments in the Western territories were established, 
the judicial system was reorganized, labor productivity increased by 
50 to 75 percent, and standardization and mass production was 
promoted worldwide. 

How was all this accomplished, with a Treasury that was 
completely broke and a Congress that hadn't been paid themselves? 
As Benjamin Franklin might have said, "That is simple." Lincoln 
tapped into the same cornerstone that had gotten the impoverished 
colonists through the American Revolution and a long period of 


Web of Debt 

internal development before that: he authorized the government to 
issue its own paper fiat money. National control was reestablished 
over banking, and the economy was jump-started with a 600 percent 
increase in government spending and cheap credit directed at 
production. 3 A century later, Franklin Roosevelt would use the same 
techniques to pull the country through the Great Depression; but 
Roosevelt's New Deal would be financed with borrowed money. 
Lincoln's government used a system of payment that was closer to the 
medieval tally. Officially called United States Notes, these nineteenth 
century tallies were popularly called "Greenbacks" because they were 
printed on the back with green ink (a feature the dollar retains today). 
They were basically just receipts acknowledging work done or goods 
delivered, which could be traded in the community for an equivalent 
value of goods or services. The Greenbacks represented man-hours 
rather than borrowed gold. Lincoln is quoted as saying, "The wages of 
men should be recognized as more important than the wages of money." 
Over 400 million Greenback dollars were printed and used to pay 
soldiers and government employees, and to buy supplies for the war. 

The Greenback system was not actually Lincoln's idea, but when 
pressure grew in Congress for the plan, he was quick to endorse it. 
The South had seceded from the Union soon after his election in 1860. 
To fund the War between the States, the Eastern banks had offered a 
loan package that was little short of extortion - $150 million advanced 
at interest rates of 24 to 36 percent. Lincoln knew the loan would be 
impossible to pay off. 4 He took the revolutionary approach because 
he had no other real choice. The government could either print its 
own money or succumb to debt slavery to the bankers. 

The Wizard Behind Lincoln's Curtain 

Lincoln's economic advisor was Henry Carey, the son of Matthew 
Carey, the printer and publisher mentioned earlier who was tutored 
by Benjamin Franklin and tutored Henry Clay. Clay was the leader of 
the Philadelphia-based political faction propounding the "American 
system" of economics. In the 1920s, historian Vernon Parrington called 
Henry Carey "our first professional economist." Thomas DiLorenzo, 
a modern libertarian writer, has called him "Lincoln's (and the 
Republican Party's) economic guru." Carey was known around the 
world during the Civil War and its aftermath, and his writings were 
translated into many European and Asian languages. 


Chapter 8 - Scarecrow with a Brain 

According to Parrington, Carey began his career as a classical 
laissez-faire economist of the British school; but he came to believe that 
American industrial development was being held back by a false 
financial policy imposed by foreign financiers. To recognize only gold 
bullion as money gave the bankers who controlled the gold a lock on 
the money supply and the economy. The price of gold was established 
in a world market, and the flow of bullion was always toward the 
great financial centers that were already glutted with it. To throw the 
world's money into a common pool that drained into these financial 
capitals was to make poorer countries the servants of these hubs. Since 
negative trade balances were settled in gold, gold followed the balance 
of trade; and until America could build up an adequate domestic 
economy, its gold would continue to drain off, leaving too little money 
for its internal needs. 

Carey came to consider "free trade" and the "gold standard" to 
be twin financial weapons forged by England for its own economic 
conquest. His solution to the gold drain was for the government to 
create an independent national currency that was non-exportable, 
one that would remain at home to do the country's own work. He 
advocated a currency founded on "national credit," something he 
defined as "a national system based entirely on the credit of the gov- 
ernment with the people, not liable to interference from abroad." Like 
the wooden tally, this paper money would simply be a unit of account 
that tallied work performed and goods delivered. Carey also sup- 
ported expanding the monetary base with silver. 5 

Carey's theories were an elaboration of the "American system" 
propounded by Henry Clay and the National Republican Party. Their 
platform was to nurture local growth and development using local 
raw materials and local money, freeing the country from dependence 
on foreign financing. Where Jackson's Democratic Party endorsed 
"free trade," the National Republican Party sought another sort of 
freedom, the right to be free from exploitation by powerful foreign 
financiers and industrialists. Free traders wanted freedom from gov- 
ernment. Protectionists looked to the government to keep them free 
from foreign marauders. Clay's protectionist platform included: 

• Government regulation of banking and credit to deter speculation 
and encourage economic development; 


Web of Debt 

• Government support for the development of science, public 

education, and national infrastructure;' 

• Regulation of privately-held infrastructure to ensure it met the 
nation's needs; 

• A program of government-sponsored railroads, and scientific and 

other aid to small farmers; 

• Taxation and tariffs to protect and promote productive domestic 

activity; and 

• Rejection of class wars, exploitation and slavery, physical or eco- 

nomic, in favor of a "Harmony of Interests" between capital and 
labor. 6 

Lincoln also endorsed these goals. He eliminated slavery, estab- 
lished a national bank, and implemented and funded national educa- 
tion, national transportation, and federal development of business and 
farming. He also set very high tariffs. He made this common-sense 

I don't know much about the tariff, but I know this much: When 
we buy manufactured goods abroad we get the goods and the 
foreigner gets the money. When we buy the manufactured goods 
at home, we get both the goods and the money. 

The Legal Tender Acts and the Legal Tender Cases 

The Greenback system undergirded Lincoln's program of domes- 
tic development by providing a much-needed national paper money 
supply. After Jackson had closed the central bank, the only paper 
money in circulation were the banknotes issued privately by individual 
state banks; and they were basically just private promises to pay later 
in hard currency (gold or silver). The Greenbacks, on the other hand, 
were currency. They were "legal tender" in themselves, money that 
did not have to be repaid later but was "as good as gold" in trade. 
Like metal coins, the Greenbacks were permanent money that could 
continue to circulate in their own right. The Legal Tender Acts of 

1 Infrastructure is defined as "the set of interconnected structural elements that 
provide the framework for supporting the entire structure." In a country, it con- 
sists of the basic facilities needed for the country's functioning, providing a 
public framework under which private enterprise can operate safely and effi- 


Chapter 8 - Scarecrow with a Brain 

1862 and 1863 made all the "coins and currency" issued by the U.S. 
Government "legal tender for all debts, public and private." Govern- 
ment-issued paper notes were made a legal substitute for gold and 
silver, even for the payment of pre-existing debts. 

In the twentieth century, the Legal Tender Statute (31 U.S.C. 
Section 5103) applied this definition of "legal tender" to Federal Reserve 
Notes; but it was an evident distortion of the intent of the original 
Acts, which made only currency issued by the United States Government 
legal tender. Federal Reserve Notes are issued by the Federal Reserve, 
a private banking corporation; but that rather obvious discrepancy 
was slipped past the American people with the smoke-and-mirrors 
illusion that the Federal Reserve was actually federal. 

Did the Greenbacks Cause Price Inflation? 

Lincoln's Greenback program has been blamed for the price infla- 
tion occurring during the Civil War, but according to Irwin Unger in 
The Greenback Era (1964): "It is now clear that inflation would have 
occurred even without the Greenback issue." 7 War is always an infla- 
tionary venture. What forced prices up during the Civil War was 
actually a severe shortage of goods. Zarlenga quotes historian J. G. 
Randall, who observed in 1937: 

The threat of inflation was more effectively curbed during the Civil 
War than during the First World War. Indeed as John K. Galbraith 
has observed, "it is remarkable that without rationing, price 
controls, or central banking, [Treasury Secretary] Chase could 
have managed the federal economy so well during the Civil 
War." 8 

Greenbacks were not the only source of funding for the Civil War. 
Bonds (government I.O.U.s) were also issued, and these too increased 
the money supply, since the banks that bought the bonds were also 
short of gold and had no other way of paying for the bonds than with 
their own newly-issued banknotes. The difference between the gov- 
ernment-issued Greenbacks and the bank-issued banknotes was that 
the Greenbacks were debt-free legal tender that did not have to be 
paid back. As Thomas Edison reasonably observed in an interview 
reported in The New York Times in 1921: 

If the Nation can issue a dollar bond it can issue a dollar bill. 
The element that makes the bond good makes the bill good also. 


Web of Debt 

The difference between the bond and the bill is that the bond 
lets the money broker collect twice the amount of the bond and 
an additional 20%. Whereas the currency, the honest sort 
provided by the Constitution pays nobody but those who 
contribute in some useful way. It is absurd to say our Country 
can issue bonds and cannot issue currency. Both are promises to 
pay, but one fattens the usurer and the other helps the People. 

The Greenbacks did lose value as against gold during the war, but 
this was to be expected, since gold was a more established currency 
that people naturally preferred. Again the problem for the Greenback 
was that it had to compete with other forms of currency. People re- 
mained suspicious of paper money, and the Greenback was not ac- 
cepted for everything. Particularly, it could not be used for the 
government's interest payments on its outstanding bonds. Zarlenga 
notes that by December 1865, the Greenback was still worth 68 cents 
to one gold dollar, not bad under the circumstances. Meanwhile, the 
Confederates' paper notes had become devalued so much that they 
were worthless. The Confederacy had made the mistake of issuing 
fiat money that was not legal tender but was only a bond or promise 
to pay after the War. As the defeat of the Confederacy became more 
and more certain, its currency's value plummeted. 9 

In 1972, the United States Treasury Department was asked to 
compute the amount of interest that would have been paid if the $400 
million in Greenbacks had been borrowed from the banks instead. 
According to the Treasury Department's calculations, in his short ten- 
ure Lincoln saved the government a total of $4 billion in interest, just 
by avoiding this $400 million loan. 10 


Chapter 9 

"When she knows you are in the country of the Winkies she will find 
you, and make you all her slaves." 

"Perhaps not," said the Scarecrow, "for we mean to destroy her." 

"Oh, that is different," said the Guardian of the Gates. "No one 
has ever destroyed her before, so I naturally thought she would make 
slaves of you, as she has of the rest. But take care. She is wicked and 
fierce, and may not allow you to destroy her." 

- The Wonderful Wizard ofOz, 
"The Search for the Wicked Witch" 

The Confederacy was not the only power that was bent on 
destroying Lincoln's Union government. Lurking behind the 
curtain pulling the strings of war were powerful foreign financiers. 
Otto von Bismarck, Chancellor of Germany in the second half of the 
nineteenth century, called these puppeteers "the masters of European 
finance." He wrote: 

I know of absolute certainty, that the division of the United States 
into federations of equal force was decided long before the Civil 
War by the high financial powers of Europe. These bankers 
were afraid that the United States, if they remained in one block 
and as one nation, would attain economic and financial 
independence, which would upset their financial domination 
over Europe and the world. Of course, in the "inner circle" of 
Finance, the voice of the Rothschilds prevailed. They saw an 
opportunity for prodigious booty if they could substitute two 
feeble democracies, burdened with debt to the financiers, ... in 
place of a vigorous Republic sufficient unto herself. Therefore, 
they sent their emissaries into the field to exploit the question of 


Chapter 9 - Lincoln Loses the Battle 

slavery and to drive a wedge between the two parts of the Union. 

. . . The rupture between the North and the South became inevitable; 
the masters of European finance employed all their forces to bring it 
about and to turn it to their advantage. 1 

The European bankers wanted a war that would return the United 
States to its colonial status, but they were not necessarily interested in 
preserving slavery. Slavery just meant that the owners had to feed 
and care for their workers. The bankers preferred "the European plan" 
- capital could exploit labor by controlling the money supply, while letting 
the laborers feed themselves. In July 1862, this ploy was revealed in a 
notorious document called the Hazard Circular, which was circulated 
by British banking interests among their American banking counter- 
parts. It said: 

Slavery is likely to be abolished by the war power and chattel 
slavery destroyed. This, I and my European friends are glad of, 

for slavery is but the owning of labor and carries with it the care of 
the laborers, while the European plan, led by England, is that capital 
shall control labor by controlling wages. This can be done by 
controlling the money. The great debt that capitalists will see to it 
is made out of the war, must be used as a means to control the 
volume of money. To accomplish this, the bonds must be used as 
a banking basis. . . . It will not do to allow the greenback, as it is 
called, to circulate as money any length of time, as we cannot control 
that. 2 

The system the bankers wanted to preserve was what Henry Clay 
and Henry Carey had called the "British system," with its twin 
weapons of "free trade" and the "gold standard" keeping the less 
industrialized countries in a colonial state, supplying raw materials 
to Britain's factories. The American South had already been subjugated 
in this way, and the bankers had now set their sights on the North, to 
be reeled in with usurious war loans; but Lincoln had refused to take 
the bait. The threat the new Greenback system posed to the bankers' 
game was reflected in an editorial that is of uncertain origin but was 
reportedly published in the The London Times in 1865. It warned: 

[I]f that mischievous financial policy, which had its origin in the 
North American Republic, should become indurated down to a 
fixture, then that Government will furnish its own money without 
cost. It will pay off debts and be without a debt. It will have all 
the money necessary to carry on its commerce. It will become 
prosperous beyond precedent in the history of the civilized 


Web of Debt 

governments of the world. The brains and the wealth of all 
countries will go to North America. That government must be 
destroyed, or it will destroy every monarchy on the globe. 3 

Bismarck wrote in 1876, "The Government and the nation escaped 
the plots of the foreign financiers. They understood at once, that the 
United States would escape their grip. The death of Lincoln was 
resolved upon." 4 Lincoln was assassinated in 1865. 

The Worm in the Apple: 
The National Banking Act of 1863-64 

The European financiers had failed to trap Lincoln's government 
with usurious war loans, but they achieved their ends by other means. 
While one faction in Congress was busy getting the Greenbacks issued 
to fund the war, another faction was preparing a National Banking 
Act that would deliver a monopoly over the power to create the nation's 
money supply to the Wall Street bankers and their European affiliates. 
The National Banking Act was promoted as establishing safeguards 
for the new national banking system; but while it was an important 
first step toward a truly national bank, it was only a compromise with 
the bankers, and buried in the fine print, it gave them exactly what 
they wanted. A private communication from a Rothschild investment 
house in London to an associate banking firm in New York dated June 
25, 1863, confided: 

The few who understand the system will either be so interested 
in its profits or so dependent upon its favors that there will be 
no opposition from that class while, on the other hand, the great 
body of people, mentally incapable of comprehending . . . will 
bear its burdens without complaint. 5 

The Act looked good on its face. It established a Comptroller of 
the Currency, whose authority was required before a National Banking 
Association could start business. It laid down regulations covering 
minimum capitalization, reserve requirements, bad debts, and 
reporting. The Comptroller could at any time appoint investigators 
to look into the affairs of any national bank. Every bank director had 
to be an American citizen, and three-quarters of the directors of a 
bank had to be residents of the State in which the bank did business. 
Interest rates were limited by State usury laws; and if no laws were in 
effect, then to 7 percent. Banks could not hold real estate for more 
than five years, except for bank buildings. National banks were not 


Chapter 9 - Lincoln Loses the Battle 

allowed to circulate notes they printed themselves. Instead, they had 
to deposit U.S. bonds with the Treasury in a sum equal to at least one- 
third of their capital. They got government-printed notes in return. 

So what was the problem? Although the new national banknotes 
were technically issued by the Comptroller of the Currency, this was 
just a formality, like the printing of Federal Reserve Notes by the Bureau 
of Engraving and Printing today. The currency bore the name of the 
bank posting the bonds, and it was issued at the bank's request. In 
effect, the National Banking Act authorized the bankers to issue and 
lend their own paper money. The banks "deposited" bonds with the 
Treasury, but they still owned the bonds; and they immediately got 
their money back in the form of their own banknotes. Topping it off, 
the National Banking Act effectively removed the competition to these 
banknotes. It imposed a heavy tax on the notes of the state-chartered 
banks, essentially abolishing them. 5 It also curtailed competition from 
the Greenbacks, which were limited to specific issues while the bankers' 
notes could be issued at will. Treasury Secretary Salmon P. Chase 
and others complained that the bankers were buying up the Greenbacks 
with their own banknotes. Zarlenga cites a historian named Dewey, 
who wrote in 1903: 

The banks were accused of absorbing the government notes as 
fast as they were issued and of putting out their own notes in 
substitution, and then at their convenience converting the notes 
into bonds on which they earned interest [in gold]. 6 

The government got what it needed at the time - a loan of 
substantial sums for the war effort and a sound circulating currency 
for an expanding economy - but the banks were the real winners. 
They not only got to collect interest on money of which they still had 
the use, but they got powerful leverage over the government as its 
creditors. The Act that was supposed to regulate the bankers wound 
up chartering not one but a whole series of private banks, which all 
had the power to create the currency of the nation. 

The National Banking Act was recommended to Congress by Trea- 
sury Secretary Chase, ironically the same official who had sponsored 
the Greenback program the Act effectively eliminated. In a popular 
1887 book called Seven Financial Conspiracies That Have Enslaved 
the American People, Sarah Emery wrote that Chase acquiesced only 
after several days of meetings and threats of financial coercion by bank 
delegates. 7 He is quoted as saying later: 


Web of Debt 

My agency in procuring the passage of the National Bank Act 
was the greatest financial mistake of my life. It has built up a 
monopoly that affects every interest in the country. It should be 
repealed. But before this can be accomplished, the people will 
be arrayed on one side and the banks on the other in a contest 
such as we have never seen in this country. 8 

Although Lincoln was assassinated in 1865, it would be another 
fifty years before the promise of his debt-free Greenbacks were erased 
from the minds of a people long suspicious of the usury bankers and 
their gilded paper money. The "Gilded Age" - the period between the 
Civil War and World War I - was a series of battles over who should 
issue the country's currency and what it should consist of. 

Skirmishes in the Currency Wars 

Chase appeared on the scene again in 1869, this time as Chief 
Justice of the Supreme Court. He wrote the opinion in Hepburn v. 
Griswold , 75 U.S. 603, holding the Legal Tender Acts to be unconsti- 
tutional. Chase considered the Greenbacks to be a temporary war 
measure. He wrote that the Constitution prohibits the States from 
passing "any . . . law impairing the obligation of contracts," and that 
to compel holders of contracts calling for payment in gold and silver 
to accept payment in "mere promises to pay dollars" was "an uncon- 
stitutional deprivation of property without due process of law." 

In 1871, however, with two new justices on the bench, the Su- 
preme Court reversed and found the Legal Tender Acts constitutional. 
In the Legal Tender cases ( Knox v. Lee, 79 U.S. 457, 20 L.Ed. 287; and 
Tuilliard v. Greenman, 110 U.S. 421, 4 S.Ct. 122, 28 L.Ed. 204), the 
Court declared that Congress has the power "to coin money and regu- 
late its value" with the objects of self-preservation and the achieve- 
ment of a more perfect union, and that "no obligation of contract can 
extend to the defeat of legitimate government authority." 

In 1873, an Act the Populists would call the "Crime of '73" elimi- 
nated the free coinage of silver. Like when King George banned the 
use of locally-issued paper scrip a century earlier, the result was "tight" 
money and hard times. A bank panic followed, which hit the western 
debtor farmers particularly hard. 

In 1874, the politically powerful farmers responded by forming 
the Greenback Party. Their proposed solution to the crisis was for the 
government to finance the building of roads and public projects with 


Chapter 9 - Lincoln Loses the Battle 

additional debt-free Greenbacks, augmenting the money supply and 
putting the unemployed to work, returning the country to the sort of 
full employment and productivity seen in Benjamin Franklin's time. 
The Greenbacks could also be used to redeem the federal debt. Under 
the "Ohio Idea," all government bonds not specifying payment in gold 
or silver would be repaid in Greenbacks. 9 The plan was not adopted, 
but the Scarecrow had shown he had a brain. The Timid Lion had 
demonstrated the courage and the collective will to organize and make 
a difference. 

In 1875, a Resumption Act called for redemption by the Treasury 
of all Greenbacks in "specie." The Greenbacks had to be withdrawn 
and replaced with hard currency, producing further contraction of 
the money supply and deeper depression. 

In 1878, the Scarecrow and the Tin Woodman joined forces to 
form the Greenback-Labor Party. They polled over one million votes 
and elected 14 Representatives to Congress. They failed to get a new 
issue of Greenbacks, but they had enough political clout to stop fur- 
ther withdrawal of existing Greenbacks from circulation. The Green- 
backs then outstanding ($346,681,016 worth) were made a perma- 
nent part of the nation's currency. 

In 1881, James Garfield became President. He boldly took a stand 
against the bankers, charging: 

Whosoever controls the volume of money in any country is 
absolute master of all industry and commerce . . . And when 
you realize that the entire system is very easily controlled, one 
way or another, by a few powerful men at the top, you will not 
have to be told how periods of inflation and depression originate. 

President Garfield was murdered not long after releasing this 
statement, when he was less than four months into his presidency. 
Depression deepened, leaving masses of unemployed to face poverty 
and starvation at a time when there was no social security or 
unemployment insurance to act as a safety net. Produce was left to 
rot in the fields, because there was no money to pay workers to harvest 
it or to buy it with when it got to market. The country was facing 
poverty amidst plenty, because there was insufficient money in 
circulation to keep the wheels of trade turning. The country sorely 
needed the sort of liquidity urged by Lincoln, Carey and the 
Greenbackers; but the bankers insisted that allowing the government 
to print its own money would be dangerously inflationary. That was 
their argument, but critics called it "humbuggery" .... 


Chapter 10 

"Hush, my dear," he said. "Don't speak so loud, or you will be 
overheard - and I should be ruined. I'm supposed to be a Great 
Wizard. " 

"And aren't you?" she asked. 

"Not a bit of it, my dear; I'm just a common man." 

"You're more than that," said the Scarecrow, in a grieved tone; 
"you're a humbug." 

"Exactly sol" declared the little man, rubbing his hands together as 
if it pleased him. "I am a humbug." 

umbug is a word that isn't used much today, but in the 

JL _L Gilded Age it was a popular term for describing frauds, shams 
and con artists. Vernon Parrington, a Pulitzer prize- winning historian 
writing in the 1920s, used it to describe the arguments of the bankers 
to silence the farmers who were trying to reform the banker-controlled 
money system in the 1890s. It was the farmers who particularly felt 
the pinch of tight money when the bankers withheld their gold. 
Parrington wrote that the farmers "pitted their homespun experience 
against the authority of the bankers and the teaching of the schools." 
In response to their clear-headed arguments, the bankers defended 
with a smokescreen of confusing rhetoric: 

Denunciation took the place of exposition, and hysteria of 
argument; and in this revel of demagoguery the so-called 
educated classes — lawyers and editors and business men — were 
perhaps the most shameless purveyors of humbuggery. Stripped 

- The Wonderful Wizard ofOz, 
"The Magic Art of the Great Humbug 


Chapter 10 - The Great Humbug 

of all hypocrisy the main issue was this: Should the control of 
currency issues — with the delegated power of inflation and deflation 
— lie in the hands of private citizens or with the elected representatives 
of the people? . . . [But] throughout the years when the subject 
was debated in every newspaper and on every stump the real 
issue was rarely presented for consideration. The bankers did 
not dare to present it, for too much was at stake and once it was 
clearly understood by a suspicious electorate their case was lost. 
Hence the strategy of the money group was to obscure the issue, an 
end they achieved by dwelling on the single point of inflation . . . } 

The Quantity Theory of Money 

The gold standard and the inflation argument that was used to 
justify it were based on the classical "quantity theory of money." The 
foundation of classical monetary theory, it held that inflation is caused 
by "too much money chasing too few goods." When "demand" (the 
money available to buy goods) increases faster than "supply" (goods 
and services), prices are forced up. If the government were allowed to 
simply issue all the Greenback dollars it needed, the money supply 
would increase faster than goods and services, and price inflation 
would result. If paper money were tied to gold, a commodity in limited 
and fixed supply, the money supply would remain stable and price 
inflation would be avoided. 

A corollary to that theory was the classical maxim that the gov- 
ernment should balance its budget at all costs. If it ran short of money, 
it was supposed to borrow from the bankers rather than print the 
money it needed, in order to keep from inflating the money supply. 
The argument was a "straw man" argument - one easily knocked 
down because it contained a logical fallacy - but the fallacy was not 
immediately obvious, because the bankers were concealing their hand. 
The fallacy lay in the assumption that the money the government bor- 
rowed from the banks already existed and was merely being recycled. 
If the bankers themselves were creating the money they lent, the argu- 
ment collapsed in a heap of straw. The money supply would obvi- 
ously increase just as much from bank-created money as from govern- 
ment-created money. In either case, it was money pulled out of an 
empty hat. Money created by the government had the advantage 
that it would not plunge the taxpayers into debt; and it provided a 
permanent money supply, one not dependent on higher and higher 
levels of borrowing to stay afloat. 


Web of Debt 

The quantity theory of money contained another logical fallacy, 
which was pointed out later by British economist John Maynard 
Keynes. Adding money ("demand") to the economy would drive up 
prices only if the "supply" side of the equation remained fixed. If new 
Greenbacks were used to create new goods and services, supply would 
increase along with demand, and prices would remain stable. 2 When 
a shoe salesman with many unsold shoes on his shelves suddenly got 
more customers, he did not raise his prices. He sold more shoes. If he 
ran out of shoes, he ordered more from the factory, which produced 
more. If he were to raise his prices, his customers would go to the 
shop down the street, where shoes were still being sold at the lower 
price. Adding more money to the economy would inflate prices only 
when the producers ran out of the labor and materials needed to make 
more goods. Before that, supply and demand would increase together, 
leaving prices as they were before. 

That theoretical revision helps explain such paradoxical data as 
the "economic mystery" of China. The Chinese have managed to 
keep the prices of their products low for thousands of years, although 
their money supply has continually been flooded with the world's 
gold and silver, and now with the world's dollars, as those currencies 
have poured in to pay for China's cheap products. The Keynesian 
explanation is that prices have remained stable because the money 
has gone into producing more goods, increasing supply along with 
demand. Keith Bradsher, writing in The New York Times in Febru- 
ary 2006, observed: 

A longstanding mystery for economic historians lies in how so 
much silver and gold flowed to China for centuries for the 
purchase of Chinese goods, yet caused little inflation in China. 
Many of China's manufactured goods remained much cheaper 
than other countries' manufactured goods until the early 1800's, 
despite the rapidly growing supply of silver sloshing around the 
Chinese economy. One theory is that Chinese output was expanding 
as fast as the precious metals supply . . . The same phenomenon 
has appeared today, as dollars inundating China have resulted 
in practically no increase in prices for most goods and services 
(although real estate prices have jumped in most cities). 3 

By 2007, Chinese economists were complaining that consumer 
prices were rising, but this was primarily due to the rising international 
costs of fuel and food, and to the fact that the yuan was tightly pegged 
to a U.S. dollar that was rapidly becoming devalued in international 


Chapter 10 - The Great Humbug 

markets. Price inflation from changes in exchange rates, as we'll see 
later, is a different thing from inflation due to an increase in the supply 
of "money" over "goods and services." 

The Remarkable Island of Guernsey 

While U.S. bankers were insisting that the government must bor- 
row rather than print the money it needed, the residents of a small 
island state off the coast of England were quietly conducting a 200- 
year experiment that would show the bankers' inflation argument to 
be a humbug. Guernsey is located among the British Channel Islands, 
about 75 miles south of Great Britain. In 1994, Dr. Bob Blain, Profes- 
sor of Sociology at Southern Illinois University, wrote of this remark- 
able island: 

In 1816 its sea walls were crumbling, its roads were muddy 
and only 4 1/2 feet wide. Guernsey's debt was 19,000 pounds. 
The island's annual income was 3,000 pounds of which 2,400 
had to be used to pay interest on its debt. Not surprisingly, 
people were leaving Guernsey and there was little employment. 

Then the government created and loaned new, interest-free 
state notes worth 6,000 pounds. Some 4,000 pounds were used 
to start the repairs of the sea walls. In 1820, another 4,500 
pounds was issued, again interest-free. In 1821, another 10,000; 
1824, 5,000; 1826, 20,000. By 1837, 50,000 pounds had been 
issued interest free for the primary use of projects like sea walls, 
roads, the marketplace, churches, and colleges. This sum more 
than doubled the island's money supply during this thirteen year 
period, but there was no inflation. In the year 1914, as the British 
restricted the expansion of their money supply due to World 
War I, the people of Guernsey commenced to issue another 
142,000 pounds over the next four years and never looked back. 
By 1958, over 542,000 pounds had been issued, all without 
inflation. 5 

Guernsey has an income tax, but the tax is relatively low (a "flat" 
20 percent), and it is simple and loophole-free. It has no inheritance 
tax, no capital gains tax, and no federal debt. Commercial banks ser- 
vice private lenders, but the government itself never goes into debt. 
When it wants to create some public work or service, it just issues the 
money it needs to pay for the work. The Guernsey government has 
been issuing its own money for nearly two centuries. During that 
time, the money supply has mushroomed to about 25 times its original 


Web of Debt 

size; yet the economy has not been troubled by price inflation, and it 
has remained prosperous and stable. 6 

Many other countries have also successfully issued their own 
money, but Guernsey is one of the few to have stayed under the radar 
long enough to escape the covert attacks of an international banking 
cartel bent on monopolizing the money-making market. As we'll see 
later, governments that have dared to create their own money have 
generally wound up dealing with a presidential assassination, a coup, 
a boycott, a war, or a concerted assault on the national currency by 
international speculators. The American colonists operated success- 
fully on their own sovereign money until British moneylenders leaned 
on Parliament to halt the practice, prompting the American Revolu- 
tion. England had a thriving economy that operated on the sovereign 
money of the king until Oliver Cromwell let the moneylenders inside 
the gates. After 1700, the right to create money was transferred to the 
private Bank of England, based on a fraudulent "gold standard" that 
allowed it to duplicate the gold in its vaults many times over in the 
form of paper banknotes. Today governments are in the position of 
the disenfranchised king, having to borrow money created by the banks 
rather than issuing it themselves. 

The Gold Humbug 

In 1863, Eleazar Lord, a New York banker, called the gold standard 
itself a humbug. He wrote: 

The so-called specie basis [or gold standard], whenever there is 
a foreign demand for coin, proves to be a mere fiction, a practical 
humbug; and whenever, by an excess of imports, this pretended 
basis is exported to pay foreign debts, the bank-notes are 
withdrawn from circulation or become worthless, the currency 
for the time is annihilated, prices fall, business is suspended, 
debts remain unpaid, panic and distress ensue, men in active 
business fail, bankruptcy, ruin, and disgrace reign. 7 

The requirement that paper banknotes be backed by a certain 
weight of gold bullion, Lord said, was a fiction. Banks did not have 
nearly enough gold to "redeem" all the paper money that was sup- 
posed to be based on it, and there was no real reason the nation's 
paper money had to be linked to gold at all. The gold standard just 
put America at the mercy of the foreign financiers who controlled the 
gold. When national imports exceeded exports, gold bullion left the 
country to pay the bill; and when gold stores shrank, the supply of 


Chapter 10 - The Great Humbug 

paper money "based" on it shrank as well. 

The real issue, as Vernon Parrington pointed out, was not what 
money consisted of but who created it. Whether the medium of ex- 
change was gold or paper or numbers in a ledger, when it was lent 
into existence by private lenders and was owed back to them with 
interest, more money would always be owed back than was created 
in the first place, spiraling the economy into perpetual debt. A dollar 
borrowed at 6 percent interest, compounded annually, grows in 100 
years to be a debt of $13,781. 8 That is true whether the money takes 
the form of gold or paper or accounting entries. The banks lend the 
dollar into existence but not the additional $13,780 needed to pay the 
loan off, forcing the public to go further and further into debt in search 
of the ephemeral interest due on their money-built-on-debt. Merchants 
continually have to raise their prices to try to cover this interest tab, 
producing perpetual price inflation. Like the Tin Woodman whose 
axe was enchanted by the Witch to chop off parts of his own body, 
the more people work, the less they seem to have left for themselves. 
They cannot keep up because their money keeps shrinking, as sellers 
keep raising their prices in a futile attempt to pay off loans that are 
collectively impossible to repay. (See Chart opposite.) 

Challenging Corporate Feudalism 

If the Scarecrow in search of a brain represented the unschooled 
farmers matching wits with the bankers, the Tin Woodman who had 
chopped out his own heart reflected the plight of the working man 
exploited by the corporation, which was increasingly replacing the 
small family business competing in a "free market." In 1886, 
corporations were given the rights and privileges of "individuals" 
although they lacked the morality and the conscience of live human 
beings. Their sole motive was profit, the sort of single-minded devotion 
to self-interest that in a live human being would be considered 
pathological. Corporations are feudalistic organizations designed in 
the structure of a pyramid, with an elite group at the top manipulating 
masses of workers below. Workers are kept marching in lockstep, 
passing orders down from above, out of fear of losing their jobs, their 
homes and their benefits if they get out of line. At the top of the 
pyramid is a small group of controllers who alone know what is really 
going on. Critics have noted that the pyramid with an overseeing eye 
at the top is also the symbol on the Federal Reserve Note, the privately- 


Web of Debt 

INFLATION: 88% Decline in Purchasing 
Power of the Dollar 
(a 1950 dollar now worth 11.5 cents) 


11 .00 


|d^a: Dept. of Labcr 

Government changes 
how they measure CP. I 

ii ii m i i ii ii i n ii ii ii ii i ii ii ii i n ii ii i n ii ii ii i ii ii ii ii I 

o r--- t3- ^- oo lt> 

kfi kfi £fi 93 

issued currency that became the national monetary unit in 1913. 

The popular grassroots movements that produced the Greenback 
and Populist Parties in the 1890s represented the interests of the com- 
mon man over these corporate and financial oppressors. "Populism" 
today tends to be associated with the political left, but the word comes 
from the Latin word simply for the "people." In the nineteenth cen- 
tury, it stood for the "government of the people, by the people, for the 
people" proclaimed by Abraham Lincoln. According to Wikipedia 
(an online encyclopedia written collaboratively by volunteers): 

Populism ... on the whole does not have a strong political identity 
as either a left-wing or right-wing movement. Populism has 
taken left-wing, right-wing, and even centrist forms. In recent 
years, conservative United States politicians have begun adopting 
populist rhetoric; for example, promising to "get big government 
off your backs." 

Although the oppressor today is seen to be big government, what 
the nineteenth century Populists were trying to get off their backs was 
a darker, more malevolent force. They still believed that the principles 


Chapter 10 - The Great Humbug 

set forth in the Constitution could be achieved through a democratic 
government of the people. They saw their antagonist rather as the 
private money power and the corporations it had spawned, which 
were threatening to take over the government unless the people inter- 
vened. Abraham Lincoln is quoted as saying: 

I see in the near future a crisis approaching that unnerves me 
and causes me to tremble for the safety of my country. 
Corporations have been enthroned, an era of corruption in high 
places will follow, and the money power of the country will 
endeavor to prolong its reign by working upon the prejudices of 
the people until the wealth is aggregated in the hands of a few 
and the Republic is destroyed. 9 

Lincoln may not actually have said this. As with many famous 
quotations, its authorship is disputed. 10 But whoever said it, the in- 
sight was prophetic. In a January 2007 article called "Who Rules 
America?", Professor James Petras wrote, "Today it is said 2% of the 
households own 80% of the world's assets. Within this small elite, a frac- 
tion embedded in financial capital owns and controls the bulk of the 
world's assets and organizes and facilitates further concentration of 
conglomerates." Professor Petras observed: 

Within the financial ruling class, . . . political leaders come from 
the public and private equity banks, namely Wall Street — 
especially Goldman Sachs, Blackstone, the Carlyle Group and 
others. They organize and fund both major parties and their 
electoral campaigns. They pressure, negotiate and draw up the 
most comprehensive and favorable legislation on global strategies 
(liberalization and deregulation) and sectoral policies .... They 
pressure the government to "bailout" bankrupt and failed 
speculative firms and to balance the budget by lowering social 
expenditures instead of raising taxes on speculative "windfall" 
profits. . . . [T]hese private equity banks are involved in every 
sector of the economy, in every region of the world economy 
and increasingly speculate in the conglomerates which are 
acquired. Much of the investment funds now in the hands of 
US investment banks, hedge funds and other sectors of the 
financial ruling class originated in profits extracted from workers 
in the manufacturing and service sector. 11 

It seems that the Tin Man has indeed been stripped of his heart 
and soul by the Witch of the East — the Wall Street bankers — just as 
Lincoln, the Greenbackers and the Populists foresaw .... 


Section II 


The Wicked Witch of the East held all the Munchkins in bondage for 
many years, making them slave for her night and day. 

- The Wonderful Wizard ofOz, 
"The Council with the Munchkins" 

Chapter 11 

"No matter how dreary and gray our homes are, we people of flesh 
and blood would rather live there than in any other country, be it ever 
so beautiful. There is no place like home." 

- Dorothy to the Scarecrow, 
The Wonderful Wizard of Oz 

People today might wonder why Dorothy, who could have 
stayed and played in the technicolor wonderland of Oz, was 
so eager to get home to her dreary Kansas farm. But readers could 
have related to that sentiment in the 1890s, when keeping the family 
homestead was a key political issue. Home foreclosures and evictions 
were occurring in record numbers. A document called "The Bankers 
Manifesto of 1892" suggested that it was all part of a deliberate plan 
by the bankers to disenfranchise the farmers and laborers of their 
homes and property. This is another document with obscure origins, 
but its introduction to Congress is attributed to Representative Charles 
Lindbergh Sr., the father of the famous aviator, who served in Con- 
gress between 1903 and 1913. The Manifesto read in part: 

We must proceed with caution and guard every move made, 
for the lower order of people are already showing signs of restless 
commotion. . . . The Farmers Alliance and Knights of Labor 
organizations in the United States should be carefully watched 
by our trusted men, and we must take immediate steps to control 
these organizations in our interest or disrupt them. . . . Capital 
[the bankers and their money] must protect itself in every possible 
manner through combination [monopoly] and legislation. The 
courts must be called to our aid, debts must be collected, bonds 


Chapter 11 - No Place Like Home 

and mortgages foreclosed as rapidly as possible. When through 
the process of the law, the common people have lost their homes, they 
will be more tractable and easily governed through the influence of 
the strong arm of the government applied to a central power of 
imperial wealth under the control of the leading financiers. People 
without homes will not quarrel with their leaders. 1 

The Farmers Alliance and Knights of Labor were the Scarecrow 
and Tin Woodman of Baum's tale. They were a serious force to be 
reckoned with. They were militant, and they were mad. To split 
these powerful opponents, the Bankers Manifesto recommended a 
tactic still used today: 

[While] our principal men . . . are engaged in forming an 
imperialism of the world . . . , the people must be kept in a state 
of political antagonism. ... By thus dividing voters, we can get 
them to expend their energies in fighting over questions of no 
importance to us ... . Thus, by discrete action, we can secure all 
that has been so generously planned and successfully 

The voters, then as now, were kept pacified with the right to vote 
for one of two or three candidates, all manipulated by the same pup- 
peteers. As Indian author Arundhati Roy would complain of the elec- 
tion process a century later: 

It's not a real choice, it's an apparent choice, like choosing a 
brand of detergent. Whether you buy Ivory Snow or Tide, they're 
both owned by Proctor and Gamble. . . . Those in positions of 
real power, the bankers, the CEOs, are not vulnerable to the 
vote, and in any case they fund both sides. 2 

It was this sort of disillusionment with the political process that 
prompted Howard Zinn, Professor Emeritus in Boston University's 
history department, to state in 2001: 

For progressive movements, the future does not lie with electoral 
politics. It lies in street warfare - protest movements and 
demonstrations, civil disobedience, strikes and boycotts - using 
all of the power consumers and workers have in direct action 
against the government and corporations. 3 

The tradition of the street protest dates back to 1894, when Coxey's 
Army marched from Ohio to Washington D.C. to petition Congress to 
revive the Greenback system .... 


Web of Debt 

Petitions in Boots 

In striking contrast to the rag-tag army he led, "General" Jacob S. 
Coxey was a wealthy Populist who owned a sand quarry, bred horses, 
and wore hand-tailored suits. He was in it for the cause, one to which 
he was so committed that he named his son "Legal Tender." Like 
Frank Baum, Coxey was a follower of the new theosophical move- 
ment that was all the rage in the 1890s. He said his monetary solution 
had come to him fully formed in a dream. 4 He didn't just dream it but 
took it right to the Capitol steps, in the sort of can-do spirit that would 
come to characterize the Populist movement. He called his protest 
march a "petition in boots." 

When Coxey' s Army, some 500 strong, entered Washington D.C. 
and marched down Pennsylvania Avenue, the perceived threat was 
so great that 1,500 U.S. soldiers were stationed to resist them. 5 Coxey 
attempted to deliver his speech on the Capitol steps but was prevented 
by the police. He wound up spending 20 days in jail for trespassing 
on the grass and for displaying a prohibited "banner" (actually a 3 
inch by 2 inch lapel pin). 6 His prepared speech was later entered into 
the Congressional record by his supporters. It was quite eloquent and 
moving, revealing the extremity and the despair of a people who had 
become progressively poorer as the bankers had become richer. Coxey 

Up these steps the lobbyists of trusts and corporations have passed 
unchallenged on their way to committee rooms, access to which we, 
the representatives of the toiling wealth-producers, have been denied. 
We stand here to-day in behalf of millions of toilers whose 
petitions have been buried in committee rooms, whose prayers 
have been unresponded to, and whose opportunities for honest, 
remunerative, productive labor have been taken from them by 
unjust legislation, which protects idlers, speculators, and 
gamblers: we come to remind the Congress here assembled of 
the declaration of a United States Senator, "that for a quarter of 
a century the rich have been growing richer, the poor poorer, 
and that by the close of the present century the middle class will 
have disappeared as the struggle for existence becomes fierce and 

. . . We have come here through toil and weary marches, 
through storms and tempests, over mountains, and amid the 


Chapter 11 - No Place Like Home 

trials of poverty and distress, to lay our grievances at the doors 
of our National Legislature . . . .We are here to petition for 
legislation which will furnish employment for every man able 
and willing to work; for legislation which will bring universal 
prosperity and emancipate our beloved country from financial 
bondage to the descendants of King George. 

. . . We are engaged in a bitter and cruel war with the enemies 
of all mankind - a war with hunger, wretchedness, and despair, 
and we ask Congress to heed our petitions and issue for the 
nation's good a sufficient volume of the same kind of money 
which carried the country through one awful war and saved 
the life of the nation. 7 

Coxey proposed two bills, one primarily to help farmers, the other 
to help urban laborers. Under his "Good Roads Bill," $500 million 
would be issued in legal tender notes or Greenbacks to construct the 
roads particularly needed in rural America. For city dwellers, Coxey 
proposed a "Noninterest-Bearing Bonds Bill." It would authorize state 
and local governments to issue noninterest-bearing bonds that would 
be used to borrow legal tender notes from the federal treasury. The 
monies raised by these transactions would be used for public projects 
such as building libraries, schools, utility plants, and marketplaces. 8 

Coxey was thus proposing something quite new and revolution- 
ary: the government would determine the projects it wanted to carry 
out, then issue the money to pay for them. The country did not need 
to be limited by the money it already had, money based on gold the 
bankers controlled. "Money" was simply a receipt for labor and ma- 
terials, which the government could and should issue itself. If the 
labor and materials were available and people wanted the work done, 
they could all get together and trade, using paper receipts of their 
own design. It was a manifestation of the theosophical tenet that you 
could achieve your dreams simply by "realizing" them - by making 
them real. You could realize the abundance you already had, just by 
bringing its potential into manifestation. 

When Coxey' s Army failed to move Congress, other "industrial 
armies" were inspired to take up the cause. There were over forty in 
all. Some 1,200 protesters managed to overcome the resistance of the 
railroad companies, federal marshals, the U.S. Army, and judicial in- 
junctions to arrive in Washington in 1894. One group, called "Hogan's 
Army," began its march in Montana — too far to walk to the Capitol, 
so the protesters commandeered a train. When the U.S. Marshall and 


Web of Debt 

his men attempted to stop them, a gun battle resulted in several inju- 
ries and one death. The U.S. Army finally seized the train. "Hogan's 
Heroes" were arrested, and Hogan spent six months in jail. 9 

Over the next century, progressively larger street protests were 
built on the precedent Coxey's Army had established. In 1913, woman 
suffragists sponsored a national march on Washington that had fed- 
eral support. In 1932, approximately 20,000 starving unemployed 
World War I veterans and their families marched for the "Bonus Bill" 
drafted by Congressman Wright Patman. The bill sought to give vet- 
erans the present value of their bonuses, which had been issued in 
1924 but were not to be paid until 1945. When their demands were 
turned down by President Hoover, the "Bonus Army" camped out in 
shantytowns called "Hoovervilles" across the Potomac. The camps 
did not disband until Hoover sent in troops, led by his brightest and 
best - Douglas MacArthur, Dwight Eisenhower, and George Patton. 
The veterans were routed and their camps set ablaze, killing three 
and injuring about a thousand. 10 On April 25, 2004, in the largest- 
ever protest march recorded up to that date, more than one million 
people filled the Capitol petitioning for women's rights. The day be- 
fore that, thousands marched to protest World Bank/IMF policies. 11 

Popularizing the Money Question 

When the Greenback Party failed to achieve monetary reform, 
many of its members joined the Populist Party. The Populists felt that 
they rather than the older political parties represented the true 
American principles of the Founding Fathers, and one fundamental 
principle they felt had been lost was that creating the national currency 
was the sole prerogative of the government. The Populists also favored 
retrieving for the Common Wealth certain public assets that had been 
usurped by private corporate cartels, including the banks, railroads, 
telephone, and telegraph; and the public lands that had been given 
away to private railroad and other corporate monopolies. 

The Populist movement of the 1890s represented the last serious 
challenge to the bankers' monopoly over the right to create the nation's 
money. In 1895, popular interest in the money question was aroused 
by a book called Coin's Financial School, which quickly sold a million 
copies. Its author, Chicago journalist William Hope Harvey, expressed 
the issues in a way that common people could understand. He 
maintained that the attempt to restrict the coinage of silver was a 
conspiracy designed to enrich the London-controlled Eastern financiers 


Chapter 11 - No Place Like Home 

at the expense of farmers and debtors. He called England "a power 
that can dictate the money of the world, and thereby create world 
misery." The "Crime of '73" - the Act limiting the free coinage of 
silver - took away the silver money of the people and replaced it with 
the gold of the British bankers. Harvey observed that the United States 
was then paying England 200 million dollars in gold annually just in 
interest on its bonds, and that the devaluation of silver as against gold 
had caused Americans to lose the equivalent of 400 million dollars in 
property to meet this interest burden. 12 

Coin's Financial School set the stage for William Jennings Bryan's 
"Cross of Gold" speech, which met with a receptive audience; and 
Harvey became an important economic adviser to Bryan in his bid for 
the Presidency. In 1896, Populist supporters and Silverites dominated 
the Democratic convention. All they needed, said one reporter, was 
"a Moses." Bryan appeared to fill the bill; but William McKinley, his 
Republican opponent, had the support of big business, including a 
$250,000 contribution from Rockefeller's Standard Oil, then an 
enormous sum. The election was close, but McKinley won; and he 
won again in 1900. 

Although McKinley had the support of big money, he was also a 
protectionist who favored high tariffs to keep foreign marauders out. 
He accepted the pro-British Teddy Roosevelt as his Vice President over 
the vigorous objection of Marcus Hanna, the power behind McKinley's 
Presidency and the man identified by later commentators as the 
"Wizard of the Gold Ounce (Oz)." Hanna told McKinley that his 
chief duty in office was just to stay alive, to save the country from 
"that madman" Roosevelt. But in 1901, McKinley failed in that 
endeavor. He was the third President to be assassinated since the 
Civil War. Although no conspiracy was proved, suspicious 
commentators noted that the elimination of the protectionist McKinley 
was highly convenient for pro-British interests. The door had been 
opened to an Anglo-American alliance backed by powerful financiers 
on both sides of the Atlantic, something that would not have happened 
in the nineteenth century, when England was still regarded by loyal 
Americans as the enemy. 13 

According to a historical treatise by Murray Rothbard, politics after 
McKinley became a struggle between two competing banking giants, 
the Morgans and the Rockefellers. The parties have sometimes changed 
hands, but the puppeteers pulling the strings have always been one of 
these two big-money players. 14 No popular third party candidate has 


Web of Debt 

had a real chance of winning because the bankers, who have the 
exclusive power to create the national money supply, hold all the trump 

Teddy Roosevelt called himself a "trustbuster;" but while the anti- 
trust laws were on the books, little harm came to the powerful corpo- 
rate monopolies called "trusts" during his administration. The trusts 
and cartels remained the puppeteers with real power, pulling the 
strings of puppet politicians who were basically bribed to stand back 
and do nothing, while the powerful conglomerates the antitrust laws 
were designed to regulate manipulated the laws. Roosevelt complained 
in 1906: 

Behind the ostensible government sits enthroned an invisible 
government owing no allegiance and acknowledging no 
responsibility to the people. To destroy this invisible government, 
to befoul the unholy alliance between corrupt business and 
corrupt politics is the first task of the statesmanship of the day. 


Chapter 12 

"But I don't understand," said Dorothy, in bewilderment. "How 
was it that you appeared to me as a great Head?" 

"That was one of my tricks," answered Oz. . . . He pointed to a 
corner in which lay the great Head, made out of many thicknesses of 
paper, and with a carefully painted face. 

"This I hung from the ceiling by a wire," said Oz. "I stood behind 
the screen and pulled a thread, to make the eyes move and the mouth 

- The Wonderful Wizard ofOz, 
"The Discovery ofOz the Terrible" 

The idea of an "invisible hand" controlling the market was 
first advanced by Scottish economist Adam Smith in The 
Wealth of Nations in 1776. But Smith's invisible hand was a benign 
one, a sort of mystical force that would make everything come out 
right if the market were just left alone. The invisible hand alluded to 
by later commentators was of a more insidious sort, a hand that wrote 
the pages of history with its own secret agenda. President Woodrow 
Wilson, who signed the Federal Reserve Act into law in 1913, said: 

We have come to be one of the worst ruled, one of the most 
completely controlled governments in the civilized world — no 
longer a government of free opinion, no longer a government by 
... a vote of the majority, but a government by the opinion and 
duress of a small group of dominant men. 


Chapter 12 - Talking Heads and Invisible Hands 

Who were these dominant men? Wilson only hinted, saying: 

Some of the biggest men in the United States, in the field of 
commerce and manufacture, are afraid of something. They know 
that there is a power somewhere so organized, so subtle, so 
watchful, so interlocked, so complete, so pervasive, that they 
had better not speak above their breath when they speak in 
condemnation of it. 1 

Many other leaders hinted that the government was controlled by 
invisible puppeteers. President Franklin D. Roosevelt, Teddy 
Roosevelt's distant cousin, acknowledged in 1933: 

The real truth of the matter is, as you and I know, that a financial 
element in the large centers has owned the government since 
the days of Andrew Jackson. . . . The country is going through a 
repetition of Jackson's fight with the Bank of the United States - 
only on a far bigger and broader basis. 

Felix Frankfurter, Justice of the Supreme Court, said in 1952: 

The real rulers in Washington are invisible and exercise power 
from behind the scenes. 

Congressman Wright Patman, Chairman of the House Banking 
and Currency Committee, said in a speech on the House floor in 1967: 

In the U.S. today, we have in effect two governments. We have 
the duly constituted government, then we have an independent, 
uncontrolled and uncoordinated government in the Federal 
Reserve, operating the money powers which are reserved to 
congress by the Constitution. 

Two decades later, Senator Daniel Inouye would state on the Con- 
gressional Record at the conclusion of the Iran Contra hearings: 

There exists a shadowy Government with its own Air Force, its 
own Navy, its own fundraising mechanism, and the ability to 
pursue its own ideas of national interest, free from all checks 
and balances, and free from the law itself. 2 

In 1927, Mayor John Hylan of New York compared the invisible 
government to a "giant octopus," recalling the "hydra-headed mon- 
ster" battled by Andrew Jackson. In a speech in the New York Times, 
Hylan said: 

The warning of Theodore Roosevelt has much timeliness 
today, for the real menace of our republic is this invisible 
government which like a giant octopus sprawls its slimy length 


Web of Debt 

over City, State, and nation ... It seizes in its long and powerful 
tentacles our executive officers, our legislative bodies, our schools, 
our courts, our newspapers, and every agency created for the 
public protection. 

. . . [A]t the head of this octopus are the Rockefeller-Standard 
Oil interest and a small group of powerful banking houses 
generally referred to as the international bankers. The little coterie 
of powerful international bankers virtually run the United States 
government for their own selfish purposes. 

They practically control both parties, write political 
platforms, make catspaws of party leaders, use the leading men 
of private organizations, and resort to every device to place in 
nomination for high public office only such candidates as will 
be amenable to the dictates of corrupt big business. . . . 

These international bankers and Rockefeller-Standard Oil 
interests control the majority of the newspapers and magazines 
in this country. They use the columns of these papers to club 
into submission or drive out of office public officials who refuse 
to do the bidding of the powerful corrupt cliques which compose 
the invisible government. 3 

In 1934, these international bankers and businessmen were labeled 
the "Robber Barons" by Matthew Josephson in a popular book of the 
same name. 4 The Robber Barons were an unscrupulous lot, who "lived 
for market conquest, and plotted takeovers like military strategy." John 
D. Rockefeller's father was called a snake-oil salesman, flimflam man, 
bigamist, and marginal criminal - never convicted but often accused, 
of crimes ranging from horse theft to rape. He once boasted, "I cheat 
my boys every chance I get, I want to make 'em sharp." Once the 
Robber Barons had established a monopoly, they would raise prices, 
drop the quality of service, and engage in unfair trading practices to 
drive other firms out of business. The abuses of these monopolies be- 
came such a national scandal that in 1890, the Sherman Antitrust Act 
passed both houses of Congress with only one dissenting vote. The 
problem was enforcing it. In 1888, the entire Commonwealth of Mas- 
sachusetts had receipts of only $7 million to oversee a Boston railroad 
monopoly with gross receipts of $40 million. 5 


Chapter 12 - Talking Heads and Invisible Hands 

Can You Trust a Trust? 

"Trusts" are concentrations of wealth in the hands of a few. The 
name came from the private banks entrusted with the money of 
depositors. Paper bank notes were called "fiduciary" money (after 
the Latin word fide, meaning to "trust"), because the bankers had to 
be "trusted" to keep a sum of gold on hand to redeem their paper 
receipts on demand. 6 These fiduciary banks played a key role in 
forming the giant trusts of the Gilded Age. The trusts had their own 
private banks, which were authorized to create and lend money at 
will. Like in the board game "Monopoly," they used this paper money 
to buy up competitors and monopolize the game. 

Monopoly growth and abuse were at their height in the Gilded 
Age, the country's greatest period of laissez faire} The trusts were so 
powerful that the trend toward monopolizing industry actually wors- 
ened after the Sherman Act was passed. Before 1898, there were an 
average of 46 major industrial mergers a year. After 1898, the num- 
ber soared to 531 a year. By 1904, the top 4 percent of American 
businesses produced 57 percent of America's total industrial produc- 
tion, with a single firm dominating at least 60 percent of production 
in 50 different industries. Ironically, the trusts became the strongest 
advocates of federal regulation, since their monopoly power depended 
on the exclusive rights granted them by the government. By planting 
their own agents in the federal commissions, they used government 
regulation to gain greater control over industry, protect themselves 
from competition, and maintain high prices. 

The Banks and the Rise of Wall Street 

There were many Robber Barons, but J. Pierpont Morgan, Andrew 
Carnegie, and John D. Rockefeller led the pack. Morgan dominated 
finance, Carnegie dominated steel, and Rockefeller monopolized oil. 
Carnegie built his business himself, and he loved competition; but Mor- 
gan was a different type of capitalist. He didn't build, he bought. He 
took over other people's businesses, and he hated competition. In 
1901, Morgan formed the first billion dollar corporation, U.S. Steel, 
out of mills he purchased from Carnegie. 

1 French for "let it be" - a policy of deliberate non-intervention in the 


Web of Debt 

Rockefeller, too, dealt with competitors by buying them out. His 
company, Standard Oil, became the greatest of all monopolies and 
the first major multinational corporation. Before World War I, the 
financial and business structure of the United States was dominated 
by Morgan's finance and transportation companies and Rockefeller's 
Standard Oil; and these conglomerates had close alliances with each 
other. Through interlocking directorships, they were said to domi- 
nate almost the entire economic fabric of the United States. 7 

Other industrialists, seeing the phenomenal success of the Morgan 
and Rockefeller trusts, dreamt of buying out their competition and 
forming huge monopolies in the same way. But with the exception of 
Carnegie, no other capitalists had the money for these predatory prac- 
tices. Aspiring empire-builders were therefore drawn to Morgan and 
the other Wall Street bankers in search of funding. Corporations be- 
gan drifting to New York to be near the big investment houses. By 
1895, New York had become the headquarters for America's major 
corporations and the home of half its millionaires. Morgan's bank at 
23 Wall Street, known as the "House of Morgan," was for decades the 
most important address in American finance. In 1920, a bomb ex- 
ploded in front of the bank, killing 40 and injuring 400. Later, the 
nexus of American finance moved to the World Trade Center, the 
chosen target for another tragic attack in 2001. 

Early in the twentieth century, Morgan controlled a Wall Street 
syndicate that financial writer John Moody called "the greatest 
financial power in the history of the world." Morgan dominated a 
hundred corporations with more than $22 billion in assets. In 1913, 
in a book called Other People's Money and How the Bankers Use It, 
Supreme Court Justice Louis Brandeis wrote that the greatest threat 
to the American economy was the "money trust." According to The 
Wall Street Tournal, the "money trust" was just another name for J. 
Pierpont Morgan, who had founded the world's most powerful bank. 
Like the Rothschilds in England, Morgan had extraordinary political 
influence in the United States. Morgan men routinely represented the 
U.S. government at international monetary meetings, something they 
continue to do today. Alan Greenspan, longstanding Chairman of 
the Federal Reserve, was a corporate director for J. P. Morgan before 
President Ronald Reagan appointed him to that post. 8 

Those fortunate corporations favored with funding from Morgan 
and the other Wall Street bankers were able to monopolize their 
industries. But where did the Wall Street banks get the money to 


Chapter 12 - Talking Heads and Invisible Hands 

underwrite all these mergers and acquisitions? The answer was 
revealed by Congressman Wright Patman and other close observers: 
the Robber Barons were pulling money out of an empty hat. Their 
privately owned banks held the ultimate credit card, a bottomless 
source of accounting-entry money that could be "lent" to their affiliated 
corporate mistresses. The funds could then be used to buy out 
competitors, corner the market in scarce raw materials, make political 
donations, lobby Congress, and control public opinion. 

Who Pulled the Strings of the Robber Barons? 

Rockefeller and Morgan were rivals who competed for power on 
the political scene, but they both had the support of powerful British 
financiers. John D. Rockefeller Sr. first made his fortune with some 
dubious railroad rebate deals during the Civil War. By 1895, he had 
acquired 95 percent of America's oil refining business. Chase Bank 
(named after Salmon P. Chase in honor of his role in passing the Na- 
tional Banking Act) was bought by Rockefeller with financing traced 
to the Rothschilds. The funds came from a New York banking firm 
called Kuhn, Loeb, & Co., which was then under the control of a 
German immigrant named Jacob Schiff. Schiff had bought into the 
partnership with financial backing from the Rothschilds. He later 
bought out Kuhn and married the eldest daughter of Loeb. The Man- 
hattan Company (the banking firm established by Hamilton and Burr 
at the turn of the nineteenth century) also came under the control of 
the Rothschilds through the banking interests of Kuhn, Loeb and the 
Warburgs, another Rothschild-related Frankfurt banking dynasty. In 
1955, Rockefeller's Chase Bank merged with the Manhattan Com- 
pany to become the Chase Manhattan Bank. 9 

The Morgan family banking interest could be traced back to England 
in an even more direct way. In the 1850s, Junius Morgan became a 
partner in what would become Peabody, Morgan, and Company, a 
London investment business specializing in transactions between 
Britain and the United States. During the Civil War, the partnership 
became the chief fiscal agent for the Union. John Pierpont Morgan, 
Junius' son, later became head of the firm's New York branch, which 
was named J. P. Morgan & Co. in 1895. J. P. Morgan Jr., John Pierpont' s 
son, then became a partner in the branch in London, where he moved 
in 1898 to learn the central banking system as dominated by the Bank 
of England. 


Web of Debt 

Although the Rothschilds were technically rivals of the Peabody/ 
Morgan firm, rumor had it that they had formed a secret alliance. 
Nathan Rothschild was not well liked, in part because of religious 
prejudice. Morgan biographer George Wheeler wrote in 1973, "Part 
of the reality of the day was an ugly resurgence of anti-Semitism. . . . 
Someone was needed as a cover." August Belmont (born Schoenberg) 
had played that role for Morgan during the Civil War; but when the 
Belmont/ Rothschild connection became common knowledge, the ploy 
no longer worked. Wheeler wrote, "Who better than J. Pierpont Mor- 
gan, a solid, Protestant exemplar of capitalism able to trace his family 
back to pre-Revolutionary times?" That could explain why, in the 
periodic financial crises of the Gilded Age, Morgan's bank always came 
out on top. In the bank panics of 1873, 1884, 1893, and 1907, while 
other banks were going under, Morgan's bank always managed to 
come up with the funds to survive and thrive. 10 

The Shadow Government 

In 1879, Rockefeller turned his company Standard Oil into the 
new vehicle called a "trust" in order to coordinate all of its produc- 
tion, refining, transportation, and distribution activities. The Rockefeller 
trust consisted of a network of companies that were wholly or par- 
tially owned by Rockefeller and that invested in each other. The 
scheme worked until 1882, when Standard Oil was driven out of Ohio 
due to antitrust investigations. In 1883, Rockefeller's trust moved to 
New York, where it proceeded to systematically devour independent 
oil producers and refiners across the country and the world. It was 
aided in these rapacious practices by illegal railroad rebates from Mor- 
gan, who had bought up the railroads with funding from the 
Rothschild bank. Independent oil refiners, being unable to compete, 
were forced to sell out at a huge loss or face financial ruin. 

By 1890, Rockefeller owned all of the independent oil refiners in 
the country and had a monopoly on worldwide oil sales. In 1911, the 
U.S. Supreme Court ruled that the Standard Oil cartel was a "danger- 
ous conspiracy" that must be broken up "for the safety of the Repub- 
lic." ("Conspiracy" is a legal term meaning an agreement between 
two or more persons to commit a crime or accomplish a legal purpose 
through illegal action.) In 1914, Standard Oil was referred to in the 
Congressional Record as the "shadow government." 11 Following the 
Court's antitrust order, the Standard Oil monolith was split into 38 


Chapter 12 - Talking Heads and Invisible Hands 

new companies, including Exxon, Mobil, Amoco, Chevron, and Arco; 
but Rockefeller secretly continued to control them by owning a voting 
majority of their stock. 

The invention of the automobile and the gasoline engine gave the 
Rockefeller/ Morgan syndicate a virtual stranglehold on the energy 
business. Rather than conserving oil and finding alternatives to the 
inefficient gasoline engine, they encouraged waste and consumption 
and ruthlessly suppressed competition. 12 International strategist Henry 
Kissinger would say much later that whoever controlled oil controlled 
the world. That was true so long as the world was powered by oil, 
and the oil cartel evidently intended to keep it that way. Early in the 
twentieth century, energy genius Nikola Tesla was reportedly on the 
verge of developing "free energy" that would be independent of both 
fossil fuels and wires. 13 But Tesla had the ill fortune of being funded 
by J. P. Morgan. When Morgan learned that there would be no way 
to charge for the new energy, he cut off Tesla' s funding and took steps 
to insure the latter' s financial ruin. Tesla wrote in a plaintive letter to 
Morgan, "I came to you with the greatest invention of all times. I 
knew you would refuse .... What chance have I to land the biggest 
Wall Street monster with the soul's spider thread?" 14 


Chapter 13 
ACT OF 1913 

"One of my greatest fears was the Witches, for while I had no 
magical powers at all I soon found out that the Witches were really able 
to do wonderful things." 

- The Wonderful Wizard ofOz, 
"The Discovery ofOz the Terrible" 

If the Wall Street bankers were the Wicked Witches of the 
Gilded Age, the coven where they conjured up their grandest of 
schemes was on Jekyll Island, a property off the coast of Georgia owned 
by J. P. Morgan. The coven was hosted in 1910 by Senator Nelson 
Aldrich of Rhode Island, a business associate of Morgan and the father- 
in-law of John D. Rockefeller Jr. The Republican "whip" in the Senate, 
Aldrich was known as the Wall Street Senator, a spokesman for big 
business and banking. 

Although Aldrich hosted the meeting, credit for masterminding it 
is attributed to a German immigrant named Paul Warburg, who was 
a partner of Kuhn, Loeb, the Rothschild's main American banking 
operation after the Civil War. Other attendees included Benjamin 
Strong, then head of Morgan's Bankers Trust Company; two other 
heads of Morgan banks; the Assistant Secretary of the U.S. Treasury; 
and Frank Vanderlip, president of the National City Bank of New 
York, then the most powerful New York bank (now called Citibank), 
which represented William Rockefeller and Kuhn, Loeb. Morgan was 


Chapter 13 - Witches' Coven 

the chief driver behind the plan, and the Morgan and Rockefeller 
factions had long been arch-rivals; but they had come together in this 
secret rendezvous to devise a banking scheme that would benefit them 
both. Vanderlip wrote later of the meeting: 

We were instructed to come one at a time and as unobtrusively 
as possible to the railroad terminal . . . where Senator Aldrich's 

private car would be in readiness Discovery, we knew, simply 

must not happen. ... If it were to be exposed publicly that our 
particular group had written a banking bill, that bill would have 
no chance whatever of passage by Congress . . . [Although the 
Aldrich Federal Reserve plan was defeated its essential points 
were contained in the plan that was finally adopted. 1 

Congressional opposition to the plan was led by William Jennings 
Bryan and Charles Lindbergh Sr., who were strongly against any bill 
suggesting a central bank or control by Wall Street money. It took a 
major bank panic to prompt Congress even to consider such a bill. 
The panic of 1907 was triggered by rumors that the Knickerbocker 
Bank and the Trust Company of America were about to become 
insolvent. Later evidence pointed to the House of Morgan as the source 
of the rumors. The public, believing the rumors, proceeded to make 
them come true by staging a run on the banks. Morgan then nobly 
helped to avert the panic by importing $100 million worth of gold 
from Europe to stop the bank run. The mesmerized public came to 
believe that the country needed a central banking system to stop future 
panics. 2 Robert Owens, a co-author of the Federal Reserve Act, later 
testified before Congress that the banking industry had conspired to 
create such financial panics in order to rouse the people to demand 
"reforms" that served the interests of the financiers. 3 Congressman 
Lindbergh charged: 

The Money Trust caused the 1907 panic [T]hose not favorable 

to the Money Trust could be squeezed out of business and the 
people frightened into demanding changes in the banking and 
currency laws which the Money Trust would frame. 4 

The 1907 panic prompted the congressional inquiry headed by 
Senator Aldrich, and the clandestine Jekyll Island meeting followed. 
The result was a bill called the Aldrich Plan, but the alert opposition 
saw through it and soundly defeated it. Bryan said he would not 
support any bill that resulted in private money being issued by private 
banks. Federal Reserve Notes must be Treasury currency, issued and 


Web of Debt 

guaranteed by the government; and the governing body must be 
appointed by the President and approved by the Senate. 

Morgan's Man in the White House 

Morgan had another problem besides the opposition in Congress. 
He needed a President willing to sign his bill. William Howard Taft, 
the President in 1910, was not a Morgan man. McKinley had been 
succeeded by his Vice President Teddy Roosevelt, who was in the Mor- 
gan camp and had been responsible for breaking up Rockefeller's Stan- 
dard Oil. Taft, who followed Roosevelt, was a Republican from 
Rockefeller's state of Ohio. He took vengeance on Morgan by filing 
antitrust suits to break up the two leading Morgan trusts, Interna- 
tional Harvester and United States Steel. Taft was a shoo-in for re- 
election in 1912. To break his hold on the Presidency, Morgan deliber- 
ately created a new party, the Progressive or Bull Moose Party, and 
brought Teddy Roosevelt out of retirement to run as its candidate. 
Roosevelt took enough votes away from Taft to allow Morgan to get 
his real candidate, Woodrow Wilson, elected on the Democratic ticket 
in 1912. Roosevelt walked away realizing he had been duped, and 
the Progressive Party was liquidated soon afterwards. Wilson was 
surrounded by Morgan men, including "Colonel" Edward Mandell 
House, who had his own rooms at the White House. Wilson called 
House his "alter ego." 5 

To get their bill passed, the Morgan faction changed its name from 
the Aldrich Bill to the Federal Reserve Act and brought it three days 
before Christmas, when Congress was preoccupied with departure 
for the holidays. The bill was so obscurely worded that no one really 
understood its provisions. The Aldrich team knew it would not pass 
without Bryan's support, so in a spirit of apparent compromise, they 
made a show of acquiescing to his demands. He said happily, "The 
right of the government to issue money is not surrendered to the banks; 
the control over the money so issued is not relinquished by the 
government . . . ." So he thought; but while the national money supply 
would be printed by the U.S. Bureau of Engraving and Printing, it 
would be issued as an obligation or debt of the government, a debt 
owed back to the private Federal Reserve with interest. And while 
Congress and the President would have some input in appointing the 
Federal Reserve Board, the Board would work behind closed doors 


Chapter 13 - Witches' Coven 

with the regional bankers, without Congressional oversight or control. 6 
The bill passed on December 22, 1913, and President Wilson signed 
it into law the next day. Later he regretted what he had done. He is 
reported to have said before he died, "I have unwittingly ruined my 
country." Bryan was also disillusioned and soon resigned as Secre- 
tary of State, in protest over President Wilson's involvement in Europe's 
war following the suspect sinking of the Lusitania. 

The first chairmanship of the Federal Reserve was offered to Paul 
Warburg, but he declined. Instead he became vice chairman, a posi- 
tion he held until the end of World War I, when he relinquished it to 
avoid an apparent conflict of interest. He would have had to negoti- 
ate with his brother Max Warburg, who was then financial advisor to 
the Kaiser and Director of the Reichsbank, Germany's private central 
bank. 7 

The Incantations of Fedspeak 

The Federal Reserve Act of 1913 was a major coup for the 
international bankers. They had battled for more than a century to 
establish a private central bank with the exclusive right to "monetize" 
the government's debt (that is, to print their own money and exchange 
it for government securities or I.O.U.s). The Act's preamble said that 
its purposes were "to provide for the establishment of Federal Reserve 
Banks, to furnish an elastic currency, to afford a means of rediscounting 
commercial paper, to establish a more effective supervision of banking 
in the United States, and for other purposes." It was the beginning of 
Fedspeak, abstract economic language that shrouded the issues in 
obscurity. "Elastic currency" is credit that can be expanded at will by 
the banks. "Rediscounting" is a technique by which banks are allowed 
to magically multiply funds by re-lending them without waiting for 
outstanding loans to mature. In plain English, the Federal Reserve 
Act authorized a private central bank to create money out of nothing, 
lend it to the government at interest, and control the national money 
supply, expanding or contracting it at will. Representative Lindbergh 
called the Act "the worst legislative crime of the ages." He warned: 

[The Federal Reserve Board] can cause the pendulum of a 
rising and falling market to swing gently back and forth by slight 
changes in the discount rate, or cause violent fluctuations by 
greater rate variation, and in either case it will possess inside 
information as to financial conditions and advance knowledge 
of the coming change, either up or down. 


Web of Debt 

This is the strangest, most dangerous advantage ever placed 
in the hands of a special privilege class by any Government that 
ever existed. . . . The financial system has been turned over to ... a 
purely profiteering group. The system is private, conducted for the 
sole purpose of obtaining the greatest possible profits from the use of 
other people's money. 

In 1934, in the throes of the Great Depression, Representative Louis 
McFadden would go further, stating on the Congressional record: 

Some people think that the Federal Reserve Banks are United 
States Government institutions. They are private monopolies which 
prey upon the people of these United States for the benefit of themselves 
and their foreign customers; foreign and domestic speculators and 
swindlers; and rich and predatory money lenders. In that dark crew 
of financial pirates there are those who would cut a man's throat 
to get a dollar out of his pocket; there are those who send money 
into states to buy votes to control our legislatures; there are those 
who maintain International propaganda for the purpose of 
deceiving us into granting of new concessions which will permit 
them to cover up their past misdeeds and set again in motion 
their gigantic train of crime. 

These twelve private credit monopolies were deceitfully and 
disloyally foisted upon this Country by the bankers who came here 
from Europe and repaid us our hospitality by undermining our 
American institutions? 

Who Owns the Federal Reserve? 

The "Federal" Reserve is actually an independent, privately-owned 
corporation. 9 It consists of twelve regional Federal Reserve banks 
owned by many commercial member banks. The amount of Federal 
Reserve stock held by each member bank is proportional to its size. 
The Federal Reserve Bank of New York holds the majority of shares in 
the Federal Reserve System (53 percent). The largest shareholders of 
the Federal Reserve Bank of New York are the largest commercial banks 
in the district of New York. 

In 1997, the New York Federal Reserve reported that its three 
largest member banks were Chase Manhattan Bank, Citibank, and 
Morgan Guaranty Trust Company. In 2000, JP Morgan and Chase 
Manhattan merged to become JPMorgan Chase Co., a bank holding 


Chapter 13 - Witches' Coven 

company with combined assets of $668 billion. That made it the third 
largest bank holding company in the country, after Citigroup (at $791 
billion) and Bank of America (at $679 billion). Bank of America was 
founded in California in 1904 and remains concentrated in the western 
and southwestern states. Citigroup is the cornerstone of the Rockefeller 

In January 2004, JPMorgan Chase & Co. undertook one of the 
largest bank mergers in history, when it acquired BankOne for $58 
billion. The result was to make this Morgan-empire bank the second- 
largest U.S. bank, both in terms of assets ($1.1 trillion to Citigroup's 
nearly $1.2 trillion) and deposits ($490 billion to Bank of America's 
$552 billion). JPMorgan Chase now issues the most Visas and 
MasterCards of any bank nationwide and holds the largest share of 
U.S. credit card balances. In 2003, credit cards surpassed cash and 
checks as a medium of exchange used in stores. 10 Thus Citibank and 
JPMorgan Chase Co., the financial cornerstones of the Rockefeller and 
Morgan empires, are not only the two largest banks in the United 
States but are the two largest shareholders of the New York Federal 
Reserve, the branch of the Fed holding a majority of the shares in the 
Federal Reserve system. The Federal Reserve evidently remains squarely 
under the control of the Robber Barons who devised it. 

The central Federal Reserve Board in Washington was set up to 
include the Treasury Secretary and Comptroller of the Currency, both 
U.S. government officials; but the Board had little control over the 12 
regional Federal Reserve Banks, which set most of their own policy. 
They followed the lead of the New York Federal Reserve Bank, where 
the Fed's real power was concentrated. Benjamin Strong, one of the 
Jekyll Island attendees, became the first president of the New York 
Federal Reserve. Strong had close ties to the financial powers of Lon- 
don and owed his career to the favor of the Morgan bank. 11 

The Master Spider 

A popular rumor has it that the Federal Reserve is owned by a 
powerful clique of foreign financiers, but this is obviously not true. It 
is owned by Federal Reserve Banks, which are owned by American 
commercial banks, which are required by law to make their major 
shareholders public; and none of these banks is predominantly foreign- 
owned. 12 But that does not mean that the banking spider is not in 
control behind the scenes. According to Hans Schicht (the financial 
insider quoted in the Introduction), the "master spider" has just moved 


Web of Debt 

to Wall Street. The greater part of U.S. banking and enterprise, says 
Schicht, is now controlled by a very small inner circle of men, perhaps 
headed by only one man. It is all done behind closed doors, through 
the game he calls "spider webbing." As noted earlier, the rules of the 
game include exercising tight personal management and control, with 
a minimum of insiders and front-men who themselves have only partial 
knowledge of the game; exercising control through "leverage" 
(mergers, takeovers, chain share holdings where one company holds 
shares of other companies, conditions annexed to loans, and so forth); 
and making any concentration of wealth invisible. The master spider 
studiously avoids close scrutiny by maintaining anonymity, taking a 
back seat, and appearing to be a philanthropist. 13 

Before World War II, the reins of international finance were held 
by the powerful European banking dynasty the House of Rothschild; 
but during the war, control crossed the Atlantic to their Wall Street 
affiliates. Schicht maintains that the role of master spider fell to David 
Rockefeller Sr., grandson on his father's side of John D. Rockefeller Sr. 
and on his mother's side of Nelson Aldrich, the Senator for whom the 
precursor to the Federal Reserve Act was named. David Rockefeller 
was a director of the Council on Foreign Relations from 1949 to 1985 
and its chairman from 1970 until 1985, and he founded the Trilateral 
Commission in 1976. Schicht states that he also convoked the 1944 
Bretton Woods Conference, at which the International Monetary Fund 
and the World Bank were devised; and he was instrumental in 
founding the elite international club called the "Bilderbergers." 14 

The Council on Foreign Relations (CFR) is an international group 
set up in 1919 to advise the members' respective governments on in- 
ternational affairs. It has been called the preeminent intermediary 
between the world of high finance, big oil, corporate elitism, and the 
U.S. government. The policies it promulgates in its quarterly journal 
become U.S. government policy. 15 

The Trilateral Commission has been described as an elite group of 
international bankers, media leaders, scholars and government offi- 
cials bent on shaping and administering a "new world order," with a 
central world government held together by economic interdepen- 
dence. 16 Former presidential candidate Barry Goldwater said of it: 

The Trilateralist Commission is international [and] is intended 
to be the vehicle for multinational consolidation of commercial 
and banking interests by seizing control of the political 
government of the United States. The Trilateralist Commission 


Chapter 13 - Witches' Coven 

represents a skillful, coordinated effort to seize control and 
consolidate the four centers of power — political, monetary, 
intellectual, and ecclesiastical. 

The "Bilderbergers" were described by a June 3, 2004 BBC special 
as "one of the most controversial and hotly-debated alliances of our 
times," composed of "an elite coterie of Western thinkers and power- 
brokers" who have been "accused of fixing the fate of the world behind 
closed doors." The group has been suspected of steering international 
policy. Some say it plots world domination. 17 But nobody knows for 
sure, because its members are sworn to secrecy and the press won't 
report on its meetings. 

The Information Monopoly 

Secrecy has been maintained because the Robber Barons have been 
able to use their monopoly over money to buy up the major media, 
educational institutions, and other outlets of public information. While 
Rockefeller was buying up universities, medical schools, and the 
Encyclopedia Britannica, Morgan bought up newspapers. In 1917, 
Congressman Oscar Callaway stated on the Congressional Record: 

In March, 1915, the J.P. Morgan interests, the steel, shipbuilding, 
and powder interests, and their subsidiary organizations, got 
together 12 men high up in the newspaper world, and employed 
them to select the most influential newspapers in the United 
States and sufficient number of them to control generally the 
policy of the daily press of the United States. . . . They found it 
was only necessary to purchase the control of 25 of the greatest 
papers. The 25 papers were agreed upon; emissaries were sent 
to purchase the policy, national and international, of these 
papers; ... an editor was furnished for each paper to properly 
supervise and edit information regarding the questions of 
preparedness, militarism, financial policies, and other things of 
national and international nature considered vital to the interests 
of the purchasers [and to suppress] everything in opposition to 
the wishes of the interests served. 18 

By 1983, according to Dean Ben Bagdikian in the The Media Mo- 
nopoly, fifty corporations owned half or more of the media business. 
By 2000, that number was down to six corporations, with directorates 
interlocked with each other and with major commercial banks. 19 
Howard Zinn observes: 


Web of Debt 

[W]hether you have a Republican or a Democrat in power, the 
Robber Barons are still there. . . . Under the Clinton administra- 
tion, more mergers of huge corporations took place [than] had 
ever taken place before under any administration. . . . [W]hether 
you have Republicans or Democrats in power, big business is the 
most powerful voice in the halls of Congress and in the ears of 
the President of the United States. 20 

In The Underground History of American Education, published 
in 2000, educator John Taylor Gatto traces how Rockefeller, Morgan 
and other members of the financial elite influenced, guided, funded, 
and at times forced compulsory schooling into the mainstream of 
American society. They needed three things for their corporate inter- 
ests to thrive: (1) compliant employees, (2) a guaranteed and depen- 
dent population, and (3) a predictable business environment. It was 
largely to promote these ends, says Gatto, that modern compulsory 
schooling was established. 21 

Harnessing the Tax Base 

The Robber Barons had succeeded in monopolizing the money 
spigots, the oil spigots, and the public's access to information; but 
Morgan wanted more. He wanted to secure the banks' loans to the 
government with a reliable source of taxes, one that was imposed 
directly on the incomes of the people. 22 There was just one snag in 
this plan: a federal income tax had consistently been declared 
unconstitutional by the U.S. Supreme Court .... 


Chapter 14 

With Dorothy hard at work, the Witch thought she would go into 
the courtyard and harness the Cowardly Lion like a horse. It would 
amuse her, she was sure, to make him draw her chariot whenever she 
wished to go to drive. 

- The Wonderful Wizard ofOz, 
"The Search for the Wicked Witch" 

If the Cowardly Lion represented the people unaware of their 
power, the harness that would hitch the Lion to the chariot of 
the bankers was the federal income tax. Slipping the harness over the 
Lion's mane was no mean feat. The American people had chafed at 
the burden of taxes ever since King George III had imposed them on 
the colonies. The colonists had been taxed for all sorts of consumer 
goods, from tea to tobacco to legal documents. Taxation without rep- 
resentation led to the revolt of the Boston Tea Party, in which colo- 
nists dumped tea into the Boston Harbor rather than pay tax on it. 

In designing the Constitution for their new Utopia, the Founding 
Fathers left the federal income tax out. They considered the taxation 
of private income, the ultimate source of productivity, to be economic 
folly. To avoid excess taxation, they decided at the Federalist Debates 
that the States and the new federal government could not impose the 
same kind of tax at the same time. For example, if the States imposed 
a property tax, the federal government could not impose one. Con- 
gress would be responsible for collecting national taxes from the States, 
which would collect taxes from their citizens. Direct taxes were to be 
apportioned according to the population of each State. Income taxes 
were considered unapportioned direct taxes in violation of this provi- 
sion of the Constitution. 


Chapter 14 - Harnessing the Lion 

The absence of an income tax had allowed the economy to grow 
and its citizens to prosper for over a century. From 1776 to 1913, 
except for brief periods when the country was at war, the federal 
government had been successfully funded mainly with customs and 
excise taxes.' In 1812, to fund the War of 1812, the first sales tax was 
imposed on gold, silverware, jewelry and watches. The first income 
tax was also imposed that year; but in order to comply with constitu- 
tional requirements, it was apportioned among the States, which col- 
lected the tax from property owners. In 1817, when the war was 
over, the new taxes were terminated. 1 

The first national income tax as we know it was imposed in 1862. 
Again it was to support a war effort, the War between the States. The 
tax was set at a mere one to three percent of income, and it applied 
only to those having annual incomes over $800, a category that then 
included less than one percent of the population. Congress avoided 
Constitutional apportionment requirements by classifying the new tax 
as an indirect tax. It was a misapplication of the law, but the tax was 
not challenged until 1871. The delay allowed a precedent to be estab- 
lished by which Congress could bypass constitutional restrictions by 
incorrectly classifying taxes. 

In 1872, this tax too was repealed. Another income tax was passed 
in 1894; but no war was in progress to win sympathy for it, and it was 
immediately struck down by the U.S. Supreme Court. In 1895, in 
Pollock v. Farmer's Loan & Trust Co ., the Court held that general 
income taxes violate the constitutional guideline that taxes levied di- 
rectly on the people are to be levied in proportion to the population of 
each State. 

That ruling has never been overruled. Instead, the Wall Street 
faction decided to make an end run around the Constitution. In 1913, 
the Sixteenth Amendment was introduced to Congress as a package 
deal along with the Federal Reserve Act. Both were supported by the 
Wall Street Senator, Nelson Aldrich. The Amendment provided: 

The Congress shall have power to lay and collect taxes on 
incomes, from whatever source derived, without apportionment 
among the several states, and without regard to any census or 

1 Customs are duties on imported goods. Excise taxes are internal taxes 
imposed on certain non-essential consumer goods. 


Web of Debt 

Wealthy businessmen who had opposed a federal income tax were 
won over when they learned they could avoid paying the tax themselves 
by setting up tax-free foundations. The tax affected only incomes over 
$4,000 a year, a sum that was then well beyond the wages of most 
Americans. The Amendment was simply worded, the tax return was 
only one page long, and the entire Tax Code was only 14 pages long. 
It seemed harmless enough at the time .... 

From Little Amendments Mighty Hydras Grow 

The Tax Code is now a 17,000-page sieve of obscure legalese, 
providing enormous loopholes for those who can afford the lobbyists 
to negotiate them. Corporations with enough clout, such as Enron, 
have had whole pages devoted to their private interests. Enron paid 
no taxes for four of the five years from 1996 through 2000, although it 
was profitable during those years. 2 The tax system has become so 
complex that tens of millions of taxpayers have to seek professional 
help to comply with its mandates. At least $250 billion are paid 
annually for these services, in addition to the $8 billion required to 
operate the Internal Revenue Service itself. The IRS has 144,000 
employees - more than all but the 36 largest U.S. corporations - and it 
employs more investigators than the FBI and the CIA combined. 
According to calculations made in 1995, more than five billion hours 
are spent annually in the effort to comply with federal income tax 
requirements - close to the total number of hours worked yearly by all 
the people in all the jobs in the State of Indiana. 3 

The obscure court holdings testing the Tax Code's constitutional- 
ity can be as impenetrable as the Code itself. Take, for example, this 
convoluted single sentence in a tax case titled Brushaber v. Union Pa- 
cific Railroad, 240 U.S. 1 (1916): 

[T]he contention that the Amendment treats a tax on income as 
a direct tax although it is relieved from apportionment and is 
necessarily therefore not subject to the rule of uniformity as such 
rule only applies to taxes which are not direct, thus destroying 
the two great classifications which have been recognized and 
enforced from the beginning, is also wholly without foundation 
since the command of the Amendment that all income taxes 
shall not be subject to apportionment by a consideration of the 
sources from which the taxed income may be derived, forbids 


Chapter 14 - Harnessing the Lion 

the application to such taxes of the rule applied in the Pollock 
Case by which alone such taxes were removed from the great 
class of excises, duties and imposts subject to the rule of 
uniformity and were placed under the other or direct class. 4 

The Brushaber case, while not easy to decipher, has been construed 
as holding that the Sixteenth Amendment does not overrule Pollock in 
declaring general income taxes unconstitutional, and that the 
Amendment does not amend the U.S. Constitution on the question of 
income taxes. Rather, said the Court, the Sixteenth Amendment applies 
to excise taxes; it merely clarifies the federal government's existing 
authority to create excise taxes without apportionment; and it applies 
only to gains and profits from commercial and investment activities. 5 

Watering the Hydra 

These fine points were of little interest to most people before World 
War II, since few people were actually affected by the tax; but war 
again provided the pretext for expanding the law's scope. In 1939, 
Congress passed the Public Salary tax, taxing the wages of federal 
employees. In 1940 it passed the Buck Act, authorizing the federal 
government to tax federal workers living outside Washington D.C. In 
1942, Congress passed the Victory Tax under its Constitutional 
authority to support the country's war efforts. A voluntary tax- 
withholding program was proposed by President Roosevelt which 
allowed workers to pay the tax in installments. This program was so 
successful that the number of taxpayers increased from 3 percent to 
62 percent of the U.S. population. In 1944, the Victory Tax and 
Voluntary Withholding Laws were repealed as required by the U.S. 
Constitution. But the federal government, without raising the matter 
before the Court or the voters, continued to collect the income tax, 
pointing for authority to the Sixteenth Amendment. 6 

Today the federal income tax has acquired the standing of a 
legitimate tax enforceable by law, despite longstanding rulings by the 
Supreme Court strictly limiting its constitutional scope. Other taxes 
have also been added to the list, which currently includes an Accounts 
Receivable Tax, Building Permit Tax, Capital Gains Tax, CDL License 
Tax, Cigarette Tax, Corporate Income Tax, Federal Unemployment 
Tax (FUTA), Food License Tax, Fuel Permit Tax, Gasoline Tax, 
Inheritance Tax, Inventory Tax, IRS Interest Charges, IRS Penalties, 
Liquor Tax, Luxury Taxes, Marriage License Tax, Medicare Tax, 


Web of Debt 

Property Tax, Real Estate Tax, Service Charge Taxes, Road Usage Taxes 
(Truckers), Road and Toll Bridge Taxes, Sales Tax, School Tax, Social 
Security Tax, State Unemployment Tax (SUTA), Telephone Taxes and 
Surcharges, Trailer Registration Tax, Utility Taxes, Vehicle License 
Registration Tax, Vehicle Sales Tax, and Workers Compensation Tax, 
among others. Estimates are that when the hidden taxes paid by 
workers all the way up the chain of production are factored in, over 
40 percent of the average citizen's income may be going to taxes. 7 

Was the Sixteenth Amendment Properly Ratified? 

A variety of challenges to the Tax Code have been prompted by 
inequities in the system. In 1984, a tax protester named Bill Benson 
spent a year visiting State capitals, researching whether the Sixteenth 
Amendment was properly ratified by the States in 1913. He found 
that of the 38 States allegedly ratifying it, 33 had amended the lan- 
guage to say something other than what was passed, a power States 
do not possess. He argued that the Amendment was properly ratified 
by only two States. He attempted unsuccessfully to defend a suit for 
tax evasion on that ground, and spent some time in jail; but that did 
not deter later tax protesters from raising the defense. In 1989, the 
Seventh Circuit Court of Appeals again rejected the argument, not 
because the court disagreed with the data but because it concluded 
that when Secretary of State Philander Knox declared the amend- 
ment adopted in 1913, he had taken the defects into consideration. 
Knox's decision, said the Seventh Circuit, "is now beyond review." 8 

So Who Was Philander Knox? 

It comes as no great surprise that Philander Knox was the Robber 
Barons' man behind the scenes. He was an attorney who became a 
multi-millionaire as legal counsel to multi-millionaires. He saved 
Andrew Carnegie from prosecution and civil suit in 1894, when it 
was shown that Carnegie had defrauded the Navy with inferior armor 
plate for U.S. warships. Knox saved Carnegie again when the 
president of the Pennsylvania Railroad testified that Carnegie had 
regularly received illegal kickbacks from the railroad. Knox also saved 
his college friend William McKinley from financial ruin, before 
McKinley won the 1896 presidential race. In 1899, President McKinley 
offered Knox the post of U.S. Attorney General, but he declined. He 


Chapter 14 - Harnessing the Lion 

was then too busy arranging the largest conglomerate in history, the 
merger of the railroad, oil, coal, iron and steel interests of Carnegie, J. 
P. Morgan, Rockefeller, and other Robber Barons into U.S. Steel. After 
completing the U.S. Steel merger, Knox accepted McKinley's offer, 
over vigorous opposition. The appointment put him in charge of 
prosecuting the antitrust laws against the same Robber Barons he had 
built a career and a personal fortune representing. When the U.S. 
Steel merger met with public outcry, Knox said he knew nothing and 
could do nothing, and U.S. Steel emerged unscathed. 

When McKinley was assassinated in 1901, Knox continued as 
Attorney General under Teddy Roosevelt, drafting federal statutes that 
gave his wealthy and powerful friends even more power and control 
over interstate commerce. Agents of the conglomerates wound up 
sitting on the government boards and commissions that set rates and 
eliminated competition in restraint of trade. Knox was appointed 
Secretary of State by President Taft in 1909, when Senator Aldrich 
gave the Sixteenth Amendment a decisive push through Congress. 
The Amendment was rushed through right before Knox resigned as 
Secretary of State. That may explain why he was willing to overlook 
a few irregularities. If he had left the matter to a successor, there was 
no telling the outcome. 9 

Do We Need a Federal Income Tax? 

In upholding these irregularities against constitutional challenge, 
courts may have been motivated by a perceived need to preserve a 
federal income tax that has come to be considered indispensable to 
funding the government. But is it? A report issued by the Grace 
Commission during the Reagan Administration concluded that most 
federal income tax revenues go just to pay the interest on the government's 
burgeoning debt. Indeed, that was the purpose for which the tax was 
originally designed. When the federal income tax was instituted in 
1913, all income tax collections were forwarded directly to the Federal 
Reserve. In fiscal year 2005, the U.S. government spent $352 billion 
just to service the government's debt. The sum represented more than 
one-third of individual income tax revenues that year, which totaled 
$927 billion. 10 

As for the other two-thirds of the individual income tax tab, the 
Grace Commission concluded that those payments did not go to service 
necessary government operations either. A cover letter addressed to 


Web of Debt 

President Reagan stated that a third of all income taxes were consumed 
by waste and inefficiency in the federal government. Another third of 
any taxes actually paid went to make up for the taxes not paid by tax 
evaders and the burgeoning underground economy, a phenomenon 
that had blossomed in direct proportion to tax increases. The report 

With two-thirds of everyone's personal income taxes wasted or 
not collected, 100 percent of what is collected is absorbed solely 
by interest on the Federal debt and by Federal Government 
contributions to transfer payments. In other words, all individual 
income tax revenues are gone before one nickel is spent on the services 
which taxpayers expect from their Government. 11 

Even the third going for interest on the federal debt could have 
been avoided, if Congress had created the money itself on the Franklin/ 
Lincoln model. But the obscurely-worded Federal Reserve Act 
delegated the power to create money to a private banking monopoly; 
and Congress, like the sleeping public, had been deceived by the 
bankers' sleight of hand. The head had thundered and the walls had 
shook. The wizard's wizardry had worked, at least on the mesmerized 
majority. Among the few who remained awake was Representative 
Charles Lindbergh Sr., who warned on the day the Federal Reserve 
Act was passed: 

This Act establishes the most gigantic trust on earth. When the 
President signs this bill, the invisible government by the Monetary 
Power will be legalized. The people may not know it 
immediately, but the day of reckoning is only a few years 

The day of reckoning came just sixteen years later. 


Chapter 15 

Uncle Henry sat upon the doorstep and looked anxiously at the 
sky, which was even grayer than usual. . . . From the far north they 
heard a low wail of the wind, and Uncle Henry and Dorothy could see 
where the long grass bowed in waves before the coming storm. 

- The Wonderful Wizard of Oz, 
"The Cyclone" 

The stock market crashed in 1929, precipitating a world 
wide depression that lasted a decade. Few people remember 
it today, but we can still get the flavor in the movies. The Great 
Depression was depicted in the barren black-and-white Kansas drought 
opening the 1939 film The Wizard of Oz . It was also the setting for 
It's a Wonderful Life, a classic 1946 film shown on TV every Christmas. 
The film starred Jimmy Stewart as a beloved small-town banker named 
George Bailey, who was driven to consider suicide after a "run" on 
his bank, when the townspeople all demanded their money and he 
couldn't pay. The promise of the Federal Reserve Act - that it would 
prevent bank panics by allowing a conglomeration of big banks to 
come to the rescue of little banks that got caught short-handed - had 
obviously failed. The Crash of 1929 was the biggest bank run in 

The problem began in the Roaring Twenties, when the Fed made 
money plentiful by keeping interest rates low. Money seemed to be 
plentiful, but what was actually flowing freely was "credit" or "debt." 
Production was up more than wages were up, so more goods were 
available than money to pay for them; but people could borrow. By 
the end of the 1920s, major consumer purchases such as cars and 
radios (which were then large pieces of furniture that sat on the floor) 


Chapter 15 - Reaping the Whirlwind 

were bought mainly on credit. Money was so easy to get that people 
were borrowing just to invest, taking out short-term, low-interest loans 
that were readily available from the banks. 

The stock market held little interest for most people until the Robber 
Barons started promoting it, after amassing large stock holdings very 
cheaply themselves. They sold the public on the idea that it was possible 
to get rich quick by buying stock on "margin" (or on credit). The 
investor could put a down payment on the stock and pay off the balance 
after its price went up, reaping a hefty profit. This investment strategy 
turned the stock market into a speculative pyramid scheme, in which 
most of the money invested did not actually exist. 1 People would open 
margin accounts, not because they could not afford to pay 100 percent 
of the stock price, but because it allowed them to leverage their 
investments, buying ten times as much stock by paying only a 10 percent 
down payment.' The public went wild over this scheme. In a 
speculative fever, many people literally "bet the farm." They were 
taking out loans against everything they owned - homes, farms, life 
insurance - anything to get the money to get into the market and 
make more money. Homesteads that had been owned free and clear 
were mortgaged to the bankers, who fanned the fever by offering 
favorable credit terms and interest rates. 2 The Federal Reserve made 
these favorable terms possible by substantially lowering the rediscount 
rate - the interest rate member banks paid to borrow from the Fed. 
The Fed thus made it easy for the banks to acquire additional reserves, 
against which they could expand the money supply by many multiples 
with loans. 

Hands Across the Atlantic 

Why would the Fed want to flood the U.S. economy with borrowed 
money, inflating the money supply? The evidence points to a scheme 
between Benjamin Strong, then Governor of the Federal Reserve Bank 
of New York, and Montagu Norman, head of the Bank of England, to 
deliver control of the financial systems of the world to a small group 
of private central bankers. Strong was a Morgan man who had a very 
close relationship with Norman - so close that it was evidently more 
than just business. In 1928, when Strong had to retire due to illness, 
Norman wrote intimately, "Whatever is to happen to us - wherever 

Leveraging means buying securities with borrowed money. 


Web of Debt 

you and I are to live - we cannot now separate and ignore these years. 
Somehow we must meet and sometimes we must live together . . . ." 4 
Professor Carroll Quigley wrote of Norman and Strong: 

In the 1920s, they were determined to use the financial power 
of Britain and of the United States to force all the major countries 
of the world to go on the gold standard and to operate it through 
central banks free from all political control, with all questions of 
international finance to be settled by agreements by such central 
banks without interference from governments. 4 

Norman, as head of the Bank of England, was determined to keep 
the British pound convertible to gold at pre-war levels, although the 
pound had lost substantial value as against gold during World War I. 
The result was a major drain on British gold reserves. To keep gold 
from flowing out of England into the United States, the Federal Re- 
serve, led by Strong, supported the Bank of England by keeping U.S. 
interest rates low, inflating the U.S. dollar. The higher interest rates in 
London made it a more attractive place for investors to put their gold, 
drawing it from the United States to England; but the lower rates in 
the United States caused an inflation bubble, which soon got out of 
hand. The meetings between Norman and Strong were very secre- 
tive, but the evidence suggests that in February 1929, they concluded 
that a collapse in the market was inevitable and that the best course 
was to let it correct "naturally" (naturally, that is, with a little help 
from the Fed). They sent advisory warnings to lists of preferred cus- 
tomers, including wealthy industrialists, politicians, and high foreign 
officials, telling them to get out of the market. Then the Fed began 
selling government securities in the open market, reducing the money 
supply by reducing the reserves available for backing loans. The bank- 
loan rate was also increased, causing rates on brokers' loans to jump 
to 20 percent. 5 

The result was a huge liquidity squeeze - a lack of available money. 
Short-term loans suddenly became available only at much higher in- 
terest rates, making buying stock on margin much less attractive. As 
fewer people bought, stock prices fell, removing the incentive for new 
buyers to purchase the stocks bought by earlier buyers on margin. 
Many investors were forced to sell at a loss by "margin calls" (calls by 
brokers for investors to bring the cash in their margin accounts up to a 
certain level after the value of their stocks had fallen). The panic was 
on, as investors rushed to dump their stocks for whatever they could 
get for them. The stock market crashed overnight. People withdrew 


Chapter 15 - Reaping the Whirlwind 

their savings from the banks and foreigners withdrew their gold, fur- 
ther depleting the reserves on which the money stock was built. From 
1929 to 1933, the money stock fell by a third, and a third of the nation's 
banks closed their doors. Strong said privately that the problem could 
easily be corrected by adding money to the shrinking money supply; 
but unfortunately for the country, he died suddenly without passing 
this bit of wisdom on. 5 It was dramatic evidence of the dangers of 
delegating the power to control the money supply to a single auto- 
cratic head of an autonomous agency. 

A vicious cyclone of debt wound up dragging all in its path into 
hunger, poverty and despair. Little money was available to buy goods, 
so workers got laid off. Small-town bankers like George Bailey were 
lucky if they escaped bankruptcy, but the big banks made out quite 
well. Many wealthy insiders also did quite well, quietly pulling out of 
the stock market just before the crash, then jumping back in when 
they could buy up companies for pennies on the dollar. While small 
investors were going under and jumping from windows, the Big Money 
Boys were accumulating the stocks that had been sold at distressed 
prices and the real estate that had been mortgaged to buy the stocks. 
The country's wealth was systematically being transferred from the 
Great American Middle Class to Big Money. 

The Homestead Laws were established in the days of Abraham 
Lincoln to encourage settlers to move onto the land and develop it. 
The country had been built by these homesteaders, who staked out 
their plots of land, farmed them, and defended them. That was the 
basis of capitalism and the American dream, the "level playing field" 
on which the players all had a fair start and something to work with. 
The field was level until the country was swept by depression, when 
homes and farms that had been in the family since the Civil War or 
the Revolution were sucked up in a cyclone of debt and delivered into 
the hands of the banks and financial elite. 

Austerity for the Poor, 
Welfare for the International Bankers 

The Federal Reserve scheme had failed, but Congress did not shut 
down the shell game and prosecute the perpetrators. Rather, the Fed- 
eral Deposit Insurance Corporation (FDIC) was instituted, ostensibly 
to prevent the Great Depression from ever happening again. It would 
do this by having the federal government provide backup money to 


Web of Debt 

cover bank failures, furnishing a form of insurance for the banks at 
the expense of the taxpayers. The FDIC was prepared to rescue some 
banks but not all. It was designed to favor rich and powerful banks. 
Ed Griffin writes in The Creature from Tekyll Island : 

The FDIC has three options when bailing out an insolvent bank. 
The first is called a payoff. It involves simply paying off the 
insured depositors [those with deposits under $100,000] and then 
letting the bank fall to the mercy of the liquidators. This is the 
option usually chosen for small banks with no political clout. 
The second possibility is called a sell off and it involves making 
arrangements for a larger bank to assume all the real assets and 
liabilities of the failing bank. Banking services are uninterrupted 
and, aside from a change in name, most customers are unaware 
of the transaction. This option is generally selected for small 
and medium banks. In both a payoff and a sell off, the FDIC 
takes over the bad loans of the failed bank and supplies the money 
to pay back the insured depositors. The third option is called 
bailout .... Irvine Sprague, a former director of the FDIC, 
explains: "In a bailout, the bank does not close, and everyone - 
insured or not - is fully protected. . . . Such privileged treatment 
is accorded by FDIC only rarely to an elect few." 

The "elect few" are the wealthy and powerful banks that are 
considered "too big to fail" without doing irreparable harm to the 
community. In a bailout, the FDIC covers all of the bank's deposits, 
even those over $100,000. Wealthy investors, including wealthy foreign 
investors, are fully protected. Griffin observes: 

Favoritism toward the large banks is obvious at many levels. . . . 
[T]he large banks get a whopping free ride when they are bailed 
out. Their uninsured accounts are paid by FDIC, and the cost of 
that benefit is passed to the smaller banks and to the taxpayer. 
This is not an oversight. Part of the plan at Jekyll Island was to give 
a competitive edge to the large banks. 7 

The FDIC shielded the bankers both from losses to themselves and 
from prosecution for the losses of others. Later, the International 
Monetary Fund was devised to serve the same backup function when 
whole countries defaulted. Austerity measures and belt-tightening 
were imposed on the poor while welfare was provided for the rich, 
saving the moneyed class from the consequences of their own risky 


Chapter 15 - Reaping the Whirlwind 

The Blame Game 

Who was to blame for this decade-long cyclone of debt and 
devastation? Milton Friedman, professor of economics at the University 
of Chicago and winner of a Nobel Prize in economics, stated: 

The Federal Reserve definitely caused the Great Depression by 
contracting the amount of currency in circulation by one-third 
from 1929 to 1933. 

The Honorable Louis T. McFadden, Chairman of the House Bank- 
ing and Currency Committee, went further. He charged: 

[The depression] was not accidental. It was a carefully contrived 
occurrence. . . . The international bankers sought to bring about a 
condition of despair here so that they might emerge as rulers of us 
all. 8 

Representative McFadden could not be accused of partisan politics. 
He had been elected by the citizens of Pennsylvania on both the 
Democratic and Republican tickets, and he had served as Chairman 
of the Banking and Currency Committee for more than ten years, 
putting him in a position to speak with authority on the vast 
ramifications of the gigantic private credit monopoly of the Federal 
Reserve. In 1934, he filed a Petition for Articles of Impeachment against 
the Federal Reserve Board, charging fraud, conspiracy, unlawful 
conversion and treason. He told Congress: 

This evil institution has impoverished and ruined the people of 
these United States, has bankrupted itself, and has practically 
bankrupted our Government. It has done this through the defects 
of the law under which it operates, through the maladministration 
of that law by the Fed and through the corrupt practices of the 
moneyed vultures who control it. 

. . . From the Atlantic to the Pacific, our Country has been 
ravaged and laid waste by the evil practices of the Fed and the 
interests which control them. At no time in our history, has the 
general welfare of the people been at a lower level or the minds of 
the people so full of despair. . . . 

Recently in one of our States, 60,000 dwelling houses and farms 
were brought under the hammer in a single day. 71,000 houses and 
farms in Oakland County, Michigan, were sold and their erstwhile 
owners dispossessed. The people who have thus been driven out 
are the wastage of the Fed. They are the victims of the Fed. Their 


Web of Debt 

children are the new slaves of the auction blocks in the revival of the 
institution of human slavery. 9 

A document called "The Bankers Manifesto of 1934" added weight 
to these charges. An update of "The Bankers Manifesto of 1892," it 
was reportedly published in The Civil Servants' Yearbook in January 
1934 and in The New American in February 1934, and was circulated 
privately among leading bankers. It read in part: 

Capital must protect itself in every way, through combination 
[monopoly] and through legislation. Debts must be collected 
and loans and mortgages foreclosed as soon as possible. When 
through a process of law, the common people have lost their 
homes, they will be more tractable and more easily governed by 
the strong arm of the law applied by the central power of wealth, 
under control of leading financiers. People without homes will 
not quarrel with their leaders. This is well known among our 
principal men now engaged in forming an imperialism of capital 
to govern the world. 10 

That was the sinister view of the Great Depression. The charitable 
explanation was that the Fed had simply misjudged. Whatever had 
happened, the monetary policy of the day had clearly failed. Change 
was in the wind. Over 2,000 schemes for monetary reform were ad- 
vanced, and populist organizations again developed large followings. 

Return to Oz: Coxey Runs for President 

Nearly four decades after he had led the march on Washington 
that inspired the march on Oz, Jacob Coxey reappeared on the scene 
to run on the Farmer-Labor Party ticket for President. Coxey, who 
was nothing if not persistent, actually ran for office thirteen times 
between 1894 and 1936. He was elected only twice, as mayor of 
Massillon, Ohio, in 1932 and 1933; but he did succeed in winning a 
majority in the Ohio presidential primary in 1932. 11 

Franklin Roosevelt came from banking and railroad money and 
had the support of big business along with the general public. He 
easily won the presidential election. But Coxey maintained that it 
was his own plan for government-financed public works that was the 
blueprint for the "New Deal," the program widely credited with 
pulling the country out of the Depression. 12 It was the same plan 
Coxey had proposed in the 1890s: Congress could jump-start the 
economy by "priming the pump" with various public projects that 


Chapter 15 - Reaping the Whirlwind 

would put the unemployed to work, using government-issued, debt- 
free money to pay for the labor and materials. Roosevelt adopted the 
pump-priming part but not the proposal to finance it with debt-free 
Greenbacks. A bill called the Thomas Amendment was passed during 
his tenure that actually authorized new issues of government 
Greenbacks, but no Greenbacks were issued under it. Instead, 
Roosevelt financed the New Deal with deficit spending and tax 

In 1944, Coxey was honored for his work by being allowed to 
deliver a speech on the Capitol steps, with the formal blessing of the 
Vice President and the Speaker of the House. It was the same speech 
he had been barred from giving there half a century before. In 1946, 
at the age of 92, he published a new plan to avoid unemployment and 
future wars. He died in 1951, at the age of 97. 13 

Another Aging Populist Returns 

Another blast from the past on the presidential campaign trail was 
William Hope Harvey, author of Coin's Financial School and economic 
adviser to William Jennings Bryan in the 1890s. Harvey ran for Presi- 
dent in 1932 on the Liberty Party ticket. Like Coxey, he was an ob- 
scure candidate who was later lost to history; but his insights would 
prove to be prophetic. Harvey stressed that people who took out loans 
at a bank were not actually borrowing "money." They were borrow- 
ing debt; and the commercial oligarchy to whom it was owed would 
eventually end up running the country. The workers would live on 
credit and buy at the company store, becoming wage-slaves who 
owned nothing of their own. 

Harvey considered money to be a direct representation of a man's 
labor, and usury and debt to be a scheme to put middleman bankers 
between a man's labor and his property. Even efficient farmers 
operating on the debt-money system would eventually have some bad 
years, and some would default on their loans. Every year there would 
be a certain number of foreclosures and the banks would get the land, 
which would be sold to the larger farm owners. The country's property 
would thus gradually become concentrated in fewer and fewer hands. 
The farms, factories and businesses would wind up owned by a few 
individuals and corporations that were controlled by the bankers who 
controlled the money supply. At the heart of the problem, said Harvey, 
was the Federal Reserve System, which allowed banks to issue debt 


Web of Debt 

and pretend it was money. This sleight of hand was what had allowed 
the bankers to slowly foreclose on the country, moving ownership to 
the Wall Street banks, brokerage houses and insurance companies. 
The ultimate culprit was the English banking system, which had 
infected and corrupted America's banking system. It was the English 
who had first demonetized silver in 1816, and who had decreased the 
value of everything else by hoarding gold. Debts to English banks had 
to be paid in gold, and countries that did not produce gold had to buy 
it to pay their debts to England. The result was to drive down the 
value of the goods those countries did produce, indenturing them to 
the English bankers. In a fictionalized book called A Tale of Two 
Countries, Harvey wrote of a fat English banker named Baron Rothe, 
who undertook to corrupt the American economy and government in 
order to place the reins of the country in the hands of his worldwide 
banking system. 

Harvey's solution was to return the Money Power to the people, 
something he proposed doing by nationalizing the banks. He would 
have nationalized other essential industries as well - those that oper- 
ated on a large scale and produced basic commodities, including pub- 
lic utilities, transportation, and steel. The profits would have gone 
into the public coffers, replacing taxes, which Harvey thought should 
be abolished. The Populists of the 1890s had campaigned to expand 
the money supply by adding silver to the gold that backed paper money, 
but Harvey now felt that both gold and silver should be de-monetized. 
The national currency did not need precious metal backing. It could 
be what Franklin and Lincoln said it was - simply a receipt for labor. 
Paper money could be backed by government services. That is a novel 
idea today, but it has a familiar precedent: the postage stamp is a kind 
of money redeemable in government services. One postage stamp 
represents the amount of government labor required to transport one 
letter from one place to another. Postage stamps are fungible and can 
be saved or traded. 14 

Although Harvey and Coxey both failed in their political 
aspirations, elements of the platforms of both were adopted in the 
New Deal. The dollar was taken off the gold standard, just as Harvey 
had advocated; and the economy was jump-started by putting the 
unemployed to work, just as Coxey had advocated. Roosevelt came 
from banker money and had the support of big business, but he also 
had a strong streak of the can-do Populist spirit .... 


Chapter 16 

"What can I do for you?" she inquired softly .... 

"Get an oilcan and oil my joints," he answered. "They are rusted 
so badly that I cannot move them at all. If I am well oiled I shall soon 
be all right again." 

- The Wonderful Wizard ofOz, 
"The Rescue of the Tin Woodman" 

In the Great Depression, labor had again rusted into non- 
productivity, due to a lack of available money to oil the wheels 
of production. In the 1890s, Coxey's plan to "prime the pump" with 
public projects was an idea ahead of its time; but in the 1930s, Roosevelt 
actually carried it out. The result was a national infrastructure that 
has been called a revolutionary model for the world. The Tennessee 
Valley Authority developed hydroelectric power for farming areas that 
had never had electricity before. It accomplished flood control and 
river diversion, provided scientific agriculture, developed new indus- 
try, and overcame illiteracy by spreading public education. The Rural 
Electrification Administration was built, along with tens of thousands 
of sanitation projects, hospitals, schools, ports and public buildings. 
Public works programs were launched, employing millions of work- 
ers. Revolutionary social programs were also introduced, including 
Social Security for the aged and disabled, unemployment insurance, 
and the right of labor to organize. Farm and home foreclosures were 
stopped, and savings accounts were restored. 1 


Chapter 16 - Oiling the Rusted Joints of the Economy 

A farm policy of "parity pricing" was enacted that ensured that 
the prices received by farmers covered the prices they paid for input 
plus a reasonable profit. If the farmers could not get the parity price, 
the government would buy their output, put it into storage, and sell it 
later. The government actually made a small profit on these 
transactions; food prices were kept stable; and the family farm system 
was preserved as the safeguard of the national food supply. With the 
push for "globalization" in later decades, thousands of family farmers 
were forced out of the farming business. Farm parity was replaced 
with farm "subsidies" that favored foods for export and were 
insufficient to cover rising costs in fuel, feed and fertilizer. 2 

Where did Roosevelt get the money for all the pump-priming 
programs in his New Deal? Coxey's plan was to issue the money 
outright, but Roosevelt did not go that far. Even for the government 
to borrow the money was considered radical at the time. The dogma 
of the day was that the federal budget must be balanced at all costs. 
The novel idea that the government could borrow the money it needed 
was suggested by John Maynard Keynes, a respected British economist, 
who argued that this was a more sensible course than austerely trying 
to balance the budget when funds were not to be had. In an open 
letter in The New York Times, Keynes advised Roosevelt that "only 
the expenditures of public authority" could reverse the Depression. 
The government had to spend to get money into circulation. 

Keynes has been called an elitist, because he was an intellectual 
with expensive tastes, wealthy friends and banker affiliations; but like 
Roosevelt, he had a strong streak of the can-do Populist spirit. At a 
time when conventional economists were gloomy naysayers maintain- 
ing that nothing could be done, Keynes was an optimist who thought 
like the Wizard of Oz. There was no reason to put up with recession, 
depression and unemployment. Balancing the budget by cutting jobs, 
at a time when people were already out of work, he thought was 
economic folly. The way to get the ball rolling again was just to roll 
up your sleeves and get busy. It could all be paid for on credit! 

But Keynes would not go so far as to advocate that the govern- 
ment should issue the money outright. "Increasing the quantity of 
money is like trying to get fat by buying a larger belt," he said. 3 It was 
a colorful analogy but a questionable one. The money supply had just 
shrunk by a third. The emaciated patient needed to be fattened up 
with a good infusion of liquidity just to replace the money that had 
been lost. 


Web of Debt 

Keynes started thinking more like the Greenbackers at the end of 
World War II, when he proposed a debt-free Greenback-style currency 
called the "Bancor" to serve as the reserves of the International Mon- 
etary Fund (the fund established to stabilize global currencies). But by 
then England's economic power had been exhausted by two world 
wars, and America called the shots. The Bancor lost out to the U.S. 
dollar, which would become the world's reserve currency along with 
gold. (More on this in Section III.) 

Challenging Classical Economic Theory 

The Keynesian theory that dominated economic policy after World 
War II was the one endorsing "deficit spending." The notion that the 
government could borrow its way to prosperity represented a major 
departure from classical economic theory. The classical "quantity 
theory of money" held that there was no need to increase the amount 
of money in circulation. When the money supply contracted, prices 
and wages would naturally adjust downward, leaving all as it was 
before. Murray Rothbard, an economist of the classical Austrian School, 
put it like this: 

We come to the startling truth that it doesn't matter what the 
supply of money is. Any supply will do as well as any other 
supply. The free market will simply adjust by changing the 
purchasing power, or effectiveness, of its [monetary] unit. There 
is no need whatever for any planned increase in the money 
supply, for the supply to rise to offset any condition, or to follow 
any artificial criteria. More money does not supply more capital, 
is not more productive, does not permit "economic growth." 4 

That was the theory, but in the Great Depression it clearly wasn't 
working. The country was suffering from crippling unemployment, 
although people wanted to work, there was work to be done, and 
there were consumers wanting to purchase the fruits of their produc- 
tive labors. The farmers' hens were laying, but the eggs never made it 
to market. The cows were producing milk, but the milk was being 
dumped on the ground. The apple trees were producing bumper crops, 
but the growers were leaving them to rot in the orchards. People 
everywhere were out of work and starving; yet the land was still fer- 
tile, the factories were ready to roll, and the raw materials were avail- 
able to run them. Keynes said that what was needed was the very 


Chapter 16 - Oiling the Rusted Joints of the Economy 

thing classical economists said would have no effect - an infusion of 
new money to get the wheels of production turning again. 

Roosevelt was slow to go along with Keynes' radical notions, but 
as the Depression got worse, he decided to give them a try. He told 
the country in a fireside chat, "We suffer from a failure of consumer 
demand because of a lack of buying power." When the United States 
entered World War II, Roosevelt had no choice but to test the limits of 
the national credit card; and in a dramatic empirical display, the pump- 
priming theory was proven to work. Unemployment dropped from 
more than 17 percent to just over 1 percent. The economy grew along 
with the money supply to double its original size, the fastest growth in 
U.S. history. 5 The country was pulled out of the Depression by prim- 
ing the pump with liquidity, funding new production that put new 
wages in consumers' pockets. 

Keynes had turned classical theory on its head. The classical 
assumption was that output ("supply") was fixed and that prices were 
flexible. Increasing "demand" (money) would therefore increase prices. 
Keynes said that prices tended to be fixed and output to be flexible. 6 
When the economy was operating at less than full employment, adding 
money would not increase prices. It would increase productivity. As 
long as there were idle resources to draw from, watering a liquidity- 
starved economy with new money would not produce inflation; it 
would produce abundance. 

And that was how it actually worked, for a while; but adding 
liquidity by borrowing money into existence did not actually create 
money. It created debt; and to service the debt, the taxpayers had to 
pay interest compounded annually. Roosevelt's plan put people to 
work, putting more money in their pockets; but much of this money 
was taken out again in the form of taxes, which went largely to pay 
the burgeoning interest tab. From 1933 to 1940, federal taxes tripled. 
In the New Deal years, the average annual federal budget deficit was 
about $3 billion out of an entire federal budget of $6 billion to $9 billion 
— a greater percentage even than today, when deficit spending has 
reached record levels. 7 Wholesale endorsement of Keynesian deficit 
spending caused the federal debt to balloon from $22 billion in 1933 to 
$8 trillion in 2005, a 364-fold increase in just 72 years. The money 
supply increased along with the debt. In 1959, when the Fed first 
began reporting M3, it was a mere $288.8 billion. By 2004, it had 
reached $9 trillion. 8 In only 45 years, M3 had multiplied by over 30 
times. In 2007, the federal debt also hit $9 trillion; and little of this 
borrowed money goes to improve infrastructure or to increase 


Web of Debt 

employment. Jobs are being out-sourced abroad, while taxpayers 
struggle to make the interest payments on the federal debt. 

Prices have gone up in tandem. Many people still remember when 
ice cream cones and comic books were 25 cents each. Today they are 
$2.50 or more. What was once a 10 cent cup of coffee is now $1.50 to 
$2.00. A house that was $30,000 in 1970 is now more than $300,000. 
In 1970, it could have been bought by a single-breadwinner family. 
For most families today, both parents have to work outside the home 
to make the mortgage payments. 9 These parabolic price increases re- 
flect a parabolic increase in the money supply. Where did all this new 
money come from? No gold was added to the asset base of the coun- 
try, which went off the gold standard in the 1930s. All of this increase 
came into existence as accounting-entry bank loans. More specifi- 
cally, it came from government loans, which never get paid back but 
just get rolled over from year to year. Under the plan of Coxey and 
the Greenbackers, rather than borrowing from banks that pulled the 
money out of an empty hat, Uncle Sam could have pulled the money 
out of his own tall hat and avoided a mushrooming debt. 

Roosevelt in the Middle 

Coxey was not alone in urging the Greenback cure for the 
economy's ills. Some influential federal officials also thought it was 
the way to reverse the depression. In a congressional address in 1933, 
Representative Louis McFadden quoted a Hearst newspaper article 
by Robert Hemphill, credit manager of the Atlanta Federal Reserve, in 
which Hemphill argued: 

We are rapidly approaching a situation where the 
government must issue additional currency. It will very soon be 
the only move remaining. It should have been the first step in the 
recovery program. Immediately upon a revival of the demand 
that the government increase the supply of currency, we shall 
again be subjected to a barrage of skillfully designed and 
cunningly circulated propaganda by means of which a small 
group of international bankers have been able, for two centuries 
to frighten the peoples of the civilized world against issuing their 
own good money in sufficient quantities to carry on their 
necessary commerce. By this simple, but amazingly successful 
device these "money changers" - parasites in a busy world intent on 
creating and exchanging wealth - have been able to preserve for their 


Chapter 16 - Oiling the Rusted Joints of the Economy 

private and exclusive right the monopoly of manufacturing an inferior 
substitute for money which they have hypnotized civilized nations 
into using, because of their pressing need to exchange goods and 
services. We shall never recover on credit. Even if it were 
obtainable, it is uncertain, unreliable, does not expand in 
accordance with demand, and contracts unexpectedly and for 
causes unrelated to the needs of commerce and industry. . . . In 
our present situation the issue of additional currency is the only way 
out. 10 

Hemphill said the government needed to issue enough new, debt- 
free currency to replace what had been lost. Congressman Wright 
Patman went further: he urged the government to take over ownership 
and operation of the banks. In an address to Congress on March 13, 
1933, he asked rhetorically: 

Why is it necessary to have Government ownership and 
operation of banks? Let us go back to the Constitution of the 
United States and follow it ... . The Constitution of the United 
States says that Congress shall coin money and regulate its value. 
That does not mean . . . that the Congress of the United States, 
composed of the duly elected representatives of the people, have 
a right to farm out the great privilege to the banking system, 
until today a few powerful bankers control the issuance and 
distribution of money - something that the Constitution of the 
United States says Congress shall do. 11 

Flanked on the right by the classical laissez-faire economists who 
said the money supply and the banking scheme should not be tampered 
with at all, and on the left by the radical reformers who said that the 
power to create money and perhaps even the banking system itself 
should be taken over by the government, Roosevelt took the middle 
road and opted for the Keynesian deficit spending alternative. He 
expanded the money supply, but he did it without unseating the private 
banking cartel. 

Instead, Roosevelt tried to regulate the bankers. In 1934, the Federal 
Reserve System was overhauled to provide additional safeguards for 
the economy and the money supply. The old Federal Reserve Board 
was dissolved and replaced by a seven-member Board of Governors, 
appointed by the U.S. President for 14-year terms. The Board was 
given greatly increased powers, including the power to appoint the 
presidents of the 12 Federal Reserve Banks. The Open Market 
Committee was created, with one representative from each Federal 


Web of Debt 

Reserve Bank. It was empowered to inject new money into the 
economy by using newly-created money to purchase government 
bonds, and to remove money from the economy by selling government 
bonds. 12 (More on this in Chapter 19.) 

Although the money supply was better protected by these measures, 
the Fed remained a hierarchical citadel, run from the top down. Today 
even the commercial banks that own the Federal Reserve Banks do 
not have ordinary voting rights. The system is subject to the control of 
a small clique of appointed banking representatives, who operate 
behind a curtain of secrecy. The Head of the Fed has usually been 
chosen from the private banking sector and has remained aligned with 
its interests. The country that holds democracy out as an ideal is in 
the anomalous position of having an economic system controlled by 
an autocratic head who is beyond the reach not only of the public but 
of the Fed's own shareholders. 13 The current Fed Chairman, Ben 
Bernanke, came from academia rather than the banking establishment, 
but he has been criticized for being out of touch with the real economy. 
His chief problem, however, seems to be that his banking-establishment 
predecessors have left him with a hot air balloon that is about to go 
the way of the Hindenberg. But more on that later .... 

Going for the Gold 

In 1933, Roosevelt took a particularly controversial step when he 
took the dollar off the gold standard. England's pound sterling had 
been removed from the gold standard in 1931, prompting foreigners 
to turn to the United States for gold at a time when Federal Reserve 
Notes were 40 percent backed by that precious metal. This meant 
that for every $2 cashed in for gold, another $3 in loans had to be 
called in by the banks. The run on the nation's gold stores danger- 
ously shrank the money supply by shrinking the dollar's gold back- 
ing. 14 If everyone holding dollars had been allowed to trade them in 
for gold, no reserves would have been left to back the dollar, and the 
money supply could have collapsed completely. To halt that alarm- 
ing trend, in 1933 Roosevelt pronounced the country officially bank- 
rupt and declared a national emergency. Then, with a wave of the 
Presidential fiat, he changed the Federal Reserve Note from a promise 
to pay in gold into legal tender itself, backed only by "the full faith 
and credit of the United States." The price of gold was subsequently 
raised, reducing the value of the dollar so that more goods could be 


Chapter 16 - Oiling the Rusted Joints of the Economy 

sold abroad. But first, all gold coins, gold bullion, and gold certificates 
held by the public were ordered turned over to the U.S. Treasury, 
under threat of fines and imprisonment. The point of this exercise 
was evidently to prevent a windfall to gold owners when the price of 
gold went up. Private gold owners were paid $20.67 per ounce in 
paper Federal Reserve money for their confiscated gold. Then the 
price of gold was raised to $35 per ounce. The result was an immedi- 
ate 40 percent devaluation of the paper money the public had just 
received for their gold. The Federal Reserve also had to turn in its 
gold, but the Fed was paid in gold certificates (paper money redeem- 
able in gold). 

Congressman McFadden was outraged. He argued that private 
gold stores were not needed to rebuild the national money supply, 
since the gold backing had just been removed from the dollar. The 
Fed was still obligated to redeem foreign holdings of Federal Reserve 
Notes in gold, and raising the price of gold reduced those obligations; 
but that was the Fed's problem, not the public's. 15 He accused the 
Federal Reserve Board and its foreign manipulators of deliberately 
draining the gold from the U.S. Treasury. "Roosevelt did what the 
International Bankers ordered him to do!", McFadden charged in a 
1934 address to Congress. "He is preparing to cancel the war debts 
by fraud!" 

McFadden maintained that the Fed was legally obligated to re- 
deem its Federal Reserve Notes in gold to the American people, and 
that it had defaulted on this obligation by irresponsibly letting its gold 
reserves be siphoned off by foreigners. The Fed was bankrupt because 
of its own mis-dealings. He told Congress: 

There was no national emergency here when Franklin D. 
Roosevelt took office excepting the bankruptcy of the Fed - a 
bankruptcy which has been going on under cover for several 
years and which has been concealed from the people so that the 
people would continue to permit their bank deposits and their 
bank reserves and their gold and the funds of the United States 
Treasury to be impounded in these bankrupt institutions. 

Under cover, the predatory International Bankers have been 
stealthily transferring the burden of the Fed debts to the people's 
Treasury and to the people themselves. They [took] the farms 
and the homes of the United States to pay for their thievery! 
That is the only national emergency that there has been here 
since the depression began. . . . Roosevelt divorced the currency 


Web of Debt 

of the United States from gold, and the United States currency 
is no longer protected by gold. It is therefore sheer dishonesty to 
say that the people's gold is needed to protect the currency. . . . Mr. 
Chairman, I am in favor of compelling the Fed to pay their own 
debts. I see no reason why the general public should be forced to pay 
the gambling debts of the International Bankers. 16 

Reining in Wall Street 

Although McFadden accused Roosevelt of bowing to the interna- 
tional bankers, FDR was not actually marching to the drummer of his 
own moneyed class, much to their chagrin. From his first months in 
office, he implemented tough legislation against the Wall Street loot- 
ing and corruption that had brought down the stock market and the 
economy. He took aim at the trusts and monopolies that had returned 
in force with the laissez-faire government of the Roaring Twenties. By 
1929, about 1,200 mergers had swallowed up more than 6,000 previ- 
ously independent companies, leaving only 200 corporations in con- 
trol of over half of all American industry. FDR reversed this trend 
with new legislation, reviving the policies initiated by his cousin Teddy. 
He also imposed strict regulations on Wall Street. The Glass-Steagall 
Act was passed, limiting speculation and preventing banks from gam- 
bling with money entrusted to them. Regular commercial banks were 
separated from investment banks dealing with stocks and bonds, in 
order to prevent bankers from creating stock offerings and then un- 
derwriting or selling the offerings by hyping the stock. Banks had to 
choose to be either commercial banks or investment banks. Commer- 
cial banks were prohibited from underwriting most securities, with 
the exception of government-issued bonds. Speculative abuses were 
regulated through the Securities Act of 1933 and the Securities Ex- 
change Act of 1934. The Securities and Exchange Commission (SEC) 
was formed; information requirements to potential investors were es- 
tablished; regulations were promulgated for buying securities on mar- 
gin (or on credit), and for bank lending for the purchase of stocks and 
bonds; and restrictions were placed on the suspect practice known as 
the short sale. (More on this in Chapter 19.) 

Needless to say, the Wall Street financiers were not pleased. "They 
are unanimous in their hatred of me," Roosevelt said defiantly, "and I 
welcome their hatred!" 17 A clique of big financiers and industrialists 
was rumored to be so unhappy with the President that they plotted to 


Chapter 16 - Oiling the Rusted Joints of the Economy 

assassinate him. Major General Smedley Butler testified before 
Congress that he had been solicited by Morgan banking interests to 
lead the plot. He said he was told by a Morgan agent that Wall Street 
was about to cut off credit to the New Deal, and that Roosevelt "has 
either got to get more money out of us or he has got to change the method 
of financing the government, and we are going to see that he does not change 
that method." 18 

Change the method of financing the government to what? 
Hemphill had urged the government to issue its own Greenback-style 
currency, and Patman had proposed nationalizing the banks. 
Greenback-style funding was actually authorized by the Thomas 
Amendment, which provided that the President could issue $3 billion 
in new Greenbacks if the Federal Reserve Banks failed to fund $3 billion 
in government bonds. 19 That authority was never exercised, but the 
threat was there. The plot to assassinate Roosevelt failed, but according 
to Smedley, it was only because he had refused to lead it. 

As for Congressman McFadden's impeachment action against the 
Fed, he never got a chance to prove his case. His Congressional inves- 
tigation was terminated by his sudden death in 1936, under suspi- 
cious circumstances. The month he died, the journal Pelley's Weekly 

Now that this sterling American patriot has made the Passing, 
it can be revealed that not long after his public utterance against 
the encroaching powers of [the international bankers], it became 
known among his intimates that he had suffered two attacks 
against his life. The first attack came in the form of two revolver 
shots fired at him from ambush as he was alighting from a cab 
in front of one of the Capital hotels. Fortunately both shots missed 
him, the bullets burying themselves in the structure of the cab. 

He became violently ill after partaking of food at a political 
banquet at Washington. His life was only saved from what was 
subsequently announced as poisoning by the presence of a 
physician friend at the banquet, who at once procured a stomach 
pump and subjected the Congressman to emergency treatment. 20 

McFadden then died mysteriously of "heart-failure sudden-death," 
following a bout of "intestinal flue." His petition for Articles of Im- 
peachment against the Federal Reserve Board for fraud, conspiracy, 
unlawful conversion and treason was never acted upon. But Wright 
Patman took up the torch where McFadden had left off ... . 


Chapter 17 

Toto jumped . . . and tipped over the screen that stood in a corner. 
As it fell with a crash they looked that way, and the next moment all 
of them were filled with wonder. For they saw, standing in just the spot 
the screen had hidden, a little old man, with a bald head and a wrinkled 
face, who seemed to be as much surprised as they were. . . . 

"I am Oz, the Great and Terrible," said the little man, in a 
trembling voice. 

- The Wonderful Wizard ofOz, 
"The Discovery ofOz the Terrible" 

If Wright Patman had been a character in The Wizard of Oz, 
he would probably have been Dorothy's feisty dog Toto, who 
nipped fearlessly at the Wicked Witch's heels, saved his mistress by 
leaping boldly across a closing drawbridge, and exposed the man be- 
hind the curtain pretending to be a Great and Powerful Wizard. 
Patman spent nearly fifty years barking at the wicked institutions he 
thought were out to get the farmers and small businessmen of his 
Texas constituency. They included big business, chain stores, tax-ex- 
empt foundations and - most wicked of all - the Federal Reserve Board, 
whose restrictive monetary policies he felt placed the interests of Wall 
Street above those of Main Street. 1 

Patman was first elected to Congress in 1928 and was re-elected 
24 times. He served as Chairman of the House Banking and Currency 
Committee from 1963 to 1975 and in Congress until his death in 1976. 
He was called an "economic Populist." He inspired a major protest 
march on Washington in 1932, the march of unemployed World War 
I veterans petitioning for the "Bonus Bill" he wrote. Patman was the 
first to call for the investigation not only of Penn Central (1970) but of 
Watergate (1972). One reviewer described him as: 


Chapter 17 - Wright Patman Exposes the Money Machine 

a cranky eccentric, out of place in the increasingly slick and 
polished world of Washington politics. But therein lay his 
significance .... He used his outsider status to force onto the 
national agenda issues that few politicians cared or dared to 
raise. 2 

In his role as Chairman of the House Banking and Currency Com- 
mittee, Patman penetrated the official Fedspeak to expose what was 
really going on. After a probing investigation of the Federal Reserve, 
he charged: 

The Open Market Committee of the Federal Reserve System . . . 
has the power to obtain, and does obtain, the printed money of 
the United States — Federal Reserve Notes — from the Bureau of 
Engraving and Printing, and exchanges these printed notes, 
which of course are not interest bearing, for United States 
government obligations that are interest bearing. After making 
the exchange, the interest bearing obligations are retained by 
the 12 Federal Reserve banks and the interest collected annually 
on these government obligations goes into the funds of the 12 
Federal Reserve banks. . . . These funds are expended by the 
system without an adequate accounting to the Congress. 3 

The Open Market Committee was the group formed in 1934 to 
take charge of "open market operations," the Fed's buying and selling 
of government securities (the bills, bonds and notes by which the 
government borrows money). Then as now, the Open Market 
Committee acquired Federal Reserve Notes from the Federal Bureau 
of Engraving and Printing, essentially for the cost of printing them. 
The average cost today is about 4 cents per bill. 4 In deft card-shark 
fashion, these dollar bills are then swapped for an equivalent stack of 
notes labeled Treasury securities. Turning Treasury securities (or debt) 
into "money" (Federal Reserve Notes) is called "monetizing" the debt. 
The government owes this money back to the Fed, although the Fed 
has advanced nothing but printed paper to earn it. In a revealing 
treatise called A Primer on Money, Patman concluded: 

The Federal Reserve is a total moneymaking machine. It can issue 
money or checks. And it never has a problem of making its 
checks good because it can obtain the $5 and $10 bills necessary 
to cover its check simply by asking the Treasury Department's 
Bureau of Engraving to print them. 5 


Web of Debt 

This statement was confirmed by Marriner Eccles, then Chairman 
of the Federal Reserve Board, in testimony before the House Banking 
and Currency Committee in 1935. Eccles acknowledged: 

In purchasing offerings of Government bonds, the banking system 
as a whole creates new money, or bank deposits. When the 
banks buy a billion dollars of Government bonds as they are 
offered . . . the banks credit the deposit account of the Treasury 
with a billion dollars. They debit their Government bond account 
a billion dollars; or they actually create, by a bookkeeping entry, a 
billion dollars. 6 

Economist John Kenneth Galbraith would later comment, "The 
process by which banks create money is so simple that the mind is 
repelled." The mind is repelled because the process is sleight of hand 
and is completely foreign to what we have been taught. In a 
phenomenon called "cognitive dissonance," we can read the words 
and still doubt whether we have read them right. To make sure that 
we have, then, here is another credible source — 

In 1993, National Geographic Magazine published an article by 
assistant editor Peter White titled "Do Banks Really Create Money 
Out of Thin Air?" White began by observing that 92 percent of the 
money supply consists, not of bills or coins, but of checkbook and other 
non-tangible money. To find out where this money comes from, he 
asked a Federal Reserve official, who said that every day, the Federal 
Reserve Bank of New York buys U.S. government securities from major 
banks and brokerage houses. That's if the Fed wants to expand the 
money supply. If it wants to contract the money supply, it sells 
government securities. White wrote: 

Say today the Fed buys a hundred million dollars in Treasury 
bills from those big securities dealers, who keep a stock of them 
to trade with the public. When the Fed pays the dealers, a 
hundred million dollars will thereby be added to the country's 
money supply, because the dealers will be credited that amount 
by their banks, which now have that much more on deposit. 
But where did the Fed get that hundred million dollars? "We 
created it," a Fed official tells me. He means that anytime the 
central bank writes a check, so to speak, it creates money. "It's 
money that didn't exist before," he says. Is there any limit on 
that? "No limit. Only the good judgement and the conscience 
of the responsible Federal Reserve people." And where did they 


Chapter 17 - Wright Patman Exposes the Money Machine 

get this vast authority? "It was delegated to them in the Federal 
Reserve Act of 1913, based on the Constitution, Article I, Section 
8. 'Congress shall have the power ... to coin money, regulate 
the value thereof . . . ."' 7 

Andrew Jackson would probably have said "vipers and thieves!" 
He stressed that the Constitution gives Congress the power only to 
coin money; and if "coining" money means "creating" money, it gives 
that power only to Congress. The Tenth Amendment provides that 
powers not delegated to the United States or forbidden to the States 
are reserved to the States or the people. In 1935, the U.S. Supreme 
Court held that "Congress may not abdicate or transfer to others its 
legitimate functions." ( Schechter Pultry v. U.S ., 29 U.S. 495, 55 U.S. 
837, 842.) 

The Real Windfall 

After relentless agitation by Patman' s Committee, the Fed finally 
agreed to rebate most of the interest it received on its government 
bonds to the U.S. Treasury. Congressman Jerry Voorhis, another early 
Fed watchdog, said that the agreement was a tacit admission that the 
Fed wasn't entitled to interest. It wasn't entitled to interest because its 
own money wasn't being lent. 8 Fed apologists today argue that since 
the interest, or most of it, is now rebated to the government, no net 
advantage has accrued to the Fed. 9 But that argument overlooks a far 
greater windfall to the banks that are the Fed's owners and real 
constituents. The bonds that have been acquired essentially for free 
become the basis of the Fed's "reserves" - the phantom money that is 
advanced many times over by commercial banks in the form of loans. 

Virtually all money in circulation today can be traced to government 
debt that has been "monetized" by the Federal Reserve and the banking 
system. This money is then multiplied many times over in the form of 
bank loans. 10 In 2006, M3 (the broadest measure of the money supply) 
was nearly $10 trillion, and the Treasury securities held by the Federal 
Reserve came to about one-tenth that sum. Thus the money supply 
has expanded by a factor of about 10 for every dollar of federal debt 
monetized by the Federal Reserve, and all of this monetary expansion 
consists of loans on which the banks have been paid interest. 11 It is this 
interest, not the interest paid to the Federal Reserve, that is the real 
windfall to the banks - this and the fact that the banks now have a 
money-making machine to back them up whenever they get in trouble 


Web of Debt 

with their "fractional reserve" lending scheme. The Jekyll Island plan 
had worked beautifully: the bankers succeeded in creating a secret 
source of unlimited funds that could be tapped into whenever they 
were caught short-handed. And to make sure their scheme remained 
a secret, they concealed this money machine in obscure Fedspeak that 
made the whole subject seem dull and incomprehensible to the 
uninitiated, and was misleading even to people who thought they 
understood it. 

In The Creature from Tekyll Island, Ed Griffin writes that "modern 
money is a grand illusion conjured by the magicians of finance and 
politics." The function of the Federal Reserve, he says, "is to convert 
debt into money. It's just that simple." The mechanism may seem 
complicated at first, but "it is simple if one remembers that the process 
is not intended to be logical but to confuse and deceive." The process 
by which the Fed converts debt into money begins after the 
government's bonds are offered to the public at auction. Griffin 

[T]he Fed takes all the government bonds which the public does 
not buy and writes a check to Congress in exchange for them 
.... There is no money to back up this check. These fiat dollars are 
created on the spot for that purpose. By calling these bonds 
"reserves," the Fed then uses them as the base for creating 9 additional 
dollars for every dollar created for the bonds themselves. The money 
created for the bonds is spent by the government, whereas the 
money created on top of those bonds is the source of all the bank 
loans made to the nation's businesses and individuals. The result 
of this process is the same as creating money on a printing press, but 
the illusion is based on an accounting trick rather than a printing 
trick. 12 

The result is the same with this difference: in the minds of most 
people, printing press money is created by the government. The 

accounting trick that generates 99 percent of the U.S. money supply today 
is the sleight of hand of private banks. 


Chapter 17 - Wright Patman Exposes the Money Machine 

The Magical Multiplying Reserves 

The shell game devised by the seventeenth century goldsmiths is 
now called "fractional reserve" banking. The fraction of a bank's 
outstanding loans that must be held in "reserve" is called the "reserve 
requirement," and it is set by the Fed. The website of the Federal 
Reserve Bank of New York (FRBNY) explains: 

Reserve requirements . . . are computed as percentages of 
deposits that banks must hold as vault cash or on deposit at a 
Federal Reserve Bank. ... As of December 2006, the reserve 
requirement was 10% on transaction deposits, and there were 
zero reserves required for time deposits. ... If the reserve 
requirement is 10%, for example, a bank that receives a $100 
deposit may lend out $90 of that deposit. If the borrower then 
writes a check to someone who deposits the $90, the bank 
receiving that deposit can lend out $81. As the process 
continues, the banking system can expand the initial deposit of 
$100 into a maximum of $1,000 of money ($100+$90+81+ 
$72.90+ . . . =$1,000). 13 

It sounds reasonable enough, but let's have a closer look. First, 
some definitions: a time deposit is a bank deposit that cannot be with- 
drawn before a date specified at the time of deposit. Transaction de- 
posit is a term used by the Federal Reserve for "checkable" deposits 
(deposits on which checks can be drawn) and other accounts that can 
be used directly as cash without withdrawal limits or restrictions. 
Transaction deposits are also called demand deposits: they can be with- 
drawn on demand at any time without notice. All checking accounts 
are demand deposits. Some savings accounts require funds to be kept 
on deposit for a minimum length of time, but most savings accounts 
also permit unlimited access to funds. 14 As long as enough money is 
kept in "reserve" to satisfy depositors who come for their money, 
"transaction deposits" can be lent many times over. The 90 percent 
the bank lends is redeposited, and 90 percent of that is relent, in a 
process that repeats about 20 times, until the $100 becomes $1,000. 

But wait! These funds belong to the depositors and must remain 
available at all times for their own use. How can the money be available 
to the depositor and lent out at the same time? Obviously, it can't. 
The money is basically counterfeited in the form of loans. The 10 
percent reserve requirement harkens back to the seventeenth century 
goldsmiths, who found through trial and error that depositors 


Web of Debt 

collectively would not come for more than about 10 percent of their 
money at one time. The money could therefore be lent 9 times over 
without anyone being the wiser. Today the scheme gets obscured 
because many banks are involved, but the collective result is the same: 
when the banks receive $1 million in deposits, they can "lend" not 
just $900,000 (90 percent of $1 million) but $9 million in computer- 
generated funds. As we'll see shortly, "reserves" are being phased 
out, so the multiple is actually higher than that; but to keep it simple, 
we'll use that figure. Consider this hypothetical case: 

You live in a small town with only one bank. You sell your house 
for $100,000 and deposit the money into your checking account at the 
bank. The bank then advances 90 percent of this sum, or $90,000, to 
Miss White to buy a house from Mr. Black. The bank proceeds to 
collect from Miss White both the interest and the principal on this 
loan. Assume the prevailing interest rate is 6.25 percent. Interest at 
6.25 percent on $90,000 over the life of a 30-year mortgage comes to 
$109,490. Miss White thus winds up owing $199,490 in principal and 
interest on the loan - not to you, whose money it allegedly was in the 
first place, but to the bank.' Legally, Miss White has title to the house; 
but the bank becomes the effective owner until she pays off her mort- 

Mr. Black now takes the $90,000 Miss White paid him for his house 
and deposits it into his checking account at the town bank. The bank 
adds $90,000 to its reserve balance at its Federal Reserve bank and 
advances 90 percent of this sum, or $81,000, to Mrs. Green, who wants 
to buy a house from Mr. Gray. Over 30 years, Mrs. Green owes the 
bank $81,000 in principal plus $98,541 in interest, or $179,541; and 
the bank has become the effective owner of another house until the 
loan is paid off. 

Mr. Gray then deposits Mrs. Green's money into his checking ac- 
count. The process continues until the bank has "lent" $900,000, on 
which it collects $900,000 in principal and $985,410 in interest, for a 
total of $1,885,410. The bank has thus created $900,000 out of thin 
air and has acquired effective ownership of a string of houses, at least 
temporarily, all from an initial $100,000 deposit; and it is owed $985,410 
in interest on this loan. The $900,000 principal is extinguished by an 

1 In practice, you probably wouldn't keep $100,000 in a checking account that 
paid no interest; you would invest it somewhere. But when the bank makes 
loans based on its collective checking account deposits, the result is the same: the 
bank keeps the interest. 


Chapter 17 - Wright Patman Exposes the Money Machine 

entry on the credit side of the ledger when the loans are paid off; but 
the other half of this conjured $2 million - the interest - remains sol- 
idly in the coffers of the bank, and if any of the borrowers should 
default on their loans, the bank becomes the owner of the mortgaged 

Instead of houses, let's try it with the $100 million in Treasury bills 
bought by the Fed in a single day in the National Geographic example, 
using $100 million in book-entry money created out of thin air. At a 
reserve requirement of 10 percent, $100 million can generate $900 
million in loans. If the interest rate on these loans is 5 percent, the 
$900 million will return $45 million the first year in interest to the 
banks that wrote the loans. At compound interest, then, a $100 million 
"investment" in money created out of thin air is doubled in about two 

To Audit or Abolish? 

The Fed reports that 95 percent of its profits are now returned to 
the U.S. Treasury. 15 But a review of its balance sheet, which is avail- 
able on the Internet, shows that it reports as profits only the interest 
received from the federal securities it holds as reserves. 16 No mention 
is made of the much greater windfall afforded to the banks that are 
the Fed's corporate owners, which use the securities as the "reserves" 
that get multiplied many times over in the form of loans. The Federal 
Reserve maintains that it is now audited every year by Price 
Waterhouse and the Government Accounting Office (GAO), an arm 
of Congress; but some functions remain off limits to the GAO, includ- 
ing its transactions with foreign central banks and its open market 
operations (the operations by which it creates money with accounting 
entities). 17 Thus the Fed's most important - and most highly suspect - 
functions remain beyond public scrutiny. 

Wright Patman proposed cleaning up the books by abolishing the 
Open Market Committee and nationalizing the Federal Reserve, re- 
claiming it as a truly federal agency under the auspices of Congress. 
The dollars the Fed created would then be government dollars, issued 
debt-free without increasing the debt burden of the country. Jerry 
Voorhis also advocated skipping the middleman and letting the gov- 
ernment issue its own money. But neither proposal was passed by 
Congress. Rather, Patman was removed as head of the House Bank- 
ing and Currency Committee, after holding that position for twelve 


Web of Debt 

years; and Voorhis lost the next California Congressional election to 
Richard Nixon, after being targeted by an aggressive smear campaign 
financed by the American Bankers' Association. 18 

The Illusion of Reserves 

At one time, a bank's "reserves" consisted of gold bullion, which 
was kept in a vault and was used to redeem paper banknotes pre- 
sented by depositors. The "fractional reserve" banking scheme con- 
cealed the fact that there was insufficient gold to redeem all the notes 
laying claim to it. Today, Federal Reserve Notes cannot be redeemed 
for anything but more paper notes when the old ones wear out; yet 
the banks continue to operate on the "fractional reserve" system, lend- 
ing out many times more money than they actually have on "reserve." 

The reserve requirement itself is becoming obsolete. According to 
a press release issued by the Federal Reserve Board on October 4, 2005, 
no reserves would be required in 2006 for the first $7.8 million of net 
transaction accounts. At a zero percent reserve, there is no limit to 
the number of times deposits can be relent. There is really no limit in 
any case, as the New York Fed acknowledged on its website. After 
explaining the exercise in which a $100 deposit becomes $1,000 in 
loan money, it obliquely conceded: 

In practice, the connection between reserve requirements and 
money creation is not nearly as strong as the exercise above would 
suggest. . . . [T]he Federal Reserve operates in a way that permits 
banks to acquire the reserves they need to meet their requirements 
from the money market, so long as they are willing to pay the 
prevailing price (the federal funds rate) for borrowed reserves. 
Consequently, reserve requirements currently play a relatively 
limited role in money creation in the United States. 

It seems that banks can conjure up as much money as they want, 
whenever they want. If a bank runs out of reserves, it can just borrow 
them from other banks or the Fed, which creates them out of thin air 
in "open market operations." That is how it seems; and to confirm 
that we have the facts straight, we'll turn to that most definitive of all 
sources, the Federal Reserve itself .... 


Chapter 18 

"I guess I should warn you, if I turn out to be particularly clear, 
you've probably misunderstood what I've said." 

- Federal Reserve Chairman Alan Greenspan 
in a speech to the Economic Club of New York, 1988 

"TV 4"odern Money Mechanics" is a revealing Federal Reserve 
_L V-Lmanual that is now out of print, perhaps because it revealed 
too much; but it is still available on the Internet. 1 It was published in 
1963 by the Chicago Federal Reserve, which as part of the Federal 
Reserve system naturally wrote in Fedspeak, so some concentration is 
needed to decipher it; but the effort rewards the diligent with a gold 
mine of insider information. The booklet begins, "The actual process 
of money creation takes place primarily in banks." The process of 
money creation occurs, it says, "when the proceeds of loans made by 
the banks are credited to borrowers' accounts." It goes on: 

Of course, [banks] do not really pay out loans from the money they 
receive as deposits. If they did this, no additional money would 
be created. What they do when they make loans is to accept 
promissory notes in exchange for credits to the borrowers' 
transaction accounts. . . . [T]he deposit credits constitute new 
additions to the total deposits of the banking system. 

The bank's "loans" are not recycled deposits of other customers; 
they are just "deposit credits" advanced against the borrower's promise 
to repay. The booklet continues, "banks can build up deposits by 
increasing loans and investments." They can build up deposits either 
by making loans of accounting-entry funds or by investing newly- 
created deposits for their own accounts. (More on this arresting 
revelation later.) The Chicago Fed then asks, "If deposit money can be 
created so easily, what is to prevent banks from making too much?" It 
answers its own question: 


Chapter 18 - A Look Inside the Fed's Playbook 

[A bank] must maintain legally required reserves, in the form of 
vault cash and / or balances at its Federal Reserve Bank, equal to 
a prescribed percentage of its deposits. . . . [E]ach bank must 
maintain . . . reserve balances at their Reserve Bank and vault 
cash which together are equal to its required reserves .... 

The implication is that the bank's "reserves" are drawn from its 
depositors' accounts, but a close reading reveals that this is not the 
case. The required reserves are made up of whatever vault cash the 
bank has on hand and something called "reserve balances maintained 
at their Reserve Bank." What are these? Under the heading "Where 
Do Bank Reserves Come From?", the Chicago Fed states: 

Increases or decreases in bank reserves can result from a number 
of factors discussed later in this booklet. From the standpoint of 
money creation, however, the essential point is that the reserves 
of banks are, for the most part, liabilities of the Federal Reserve 
Banks, and net changes in them are largely determined by actions 
of the Federal Reserve System. . . . One of the major responsibilities 
of the Federal Reserve System is to provide the total amount of reserves 
consistent with the monetary needs of the economy at reasonably 
stable prices. 

If the "reserves" had come from the depositors, the Fed would not 
have the "responsibility" of providing them "at reasonably stable 
prices." They would already be in the banks' vaults or on their books. 
Recall what the New York Fed said on its website: "[T]he Federal Re- 
serve operates in a way that permits banks to acquire the reserves 
they need to meet their requirements from the money market, so long 
as they are willing to pay the prevailing price (the federal funds rate) for 
borrowed reserves." 

In short, banks don't need to have the money they lend before they 
make loans, because the Fed will "provide" the necessary reserves by 
making them available at the federal funds rate. The banks borrow 
from the Fed or other banks at a low interest rate and extend credit to 
their customers at a higher rate. Where the sleight of hand comes in is 
that the Fed itself creates the reserves it lends out of thin air. (More on this 

That is one bit of sleight of hand. Another is that the loan of newly- 
created money becomes a deposit, which the bank or its fellow banks 
can then relend many times over, multiplying the money supply and 
charging interest each time. A source that explains this in easier lan- 


Web of Debt 

guage than the Fed itself is the informative website by William Hummel 
cited earlier, called "Money: What It Is, How It Works." He writes: 

Banks with adequate capital can and do lend without adequate 
reserves on hand. If a bank has a creditworthy borrower and a 
profitable opportunity, it will issue the loan and then borrow the 
required reserves in the money market. 1 

He uses the example of a bank with $100 million in demand de- 
posits and $10 million in reserves - just enough reserves to meet the 
reserve ratio of 10 percent (the approximate amount needed to pay 
any depositors who might come for their money). The bank plans to 
issue new mortgage loans totaling $5 million for a new housing devel- 
opment. Can it do so before it acquires more reserves? Hummel says 
it can. Why? Because the bank is allowed to enter the newly-created loan 
money as a deposit on its books. The bank's assets and liabilities increase 
by the same amount, leaving its reserve requirement unaffected. When 
the borrower spends the money, it is transferred out of the bank into 
other banks, so the originating bank has to come up with new money 
to meet its reserve requirement; but it can do this by borrowing the 
money from the Fed or some other source in the money market. Mean- 
while, the banks that got the $5 million now have new deposits against 
which they too can make new loans. Since they also need to keep 
only 10 percent in reserve to back these new deposits, they can lend 
out $4,500,000, increasing the money supply by that amount; and so 
the process continues. 3 

So let's review: the bank lends money it doesn't have, and this 
loan of new money becomes a "deposit," balancing its books. (This is 
called "double-entry bookkeeping.") When the borrower spends the 
money, the bank brings its reserves back up to 10 percent by borrowing 
from the Fed or other sources. As for the Fed itself, it can't run out of 
reserves because that is what "open market operations" are all about. 
Like Santa Claus, the Fed can't run out of reserves because it makes 
the reserves. 

How this is done was explained by the Chicago Fed with the fol- 
lowing hypothetical case. If it seems hard to follow or makes no sense, 
don't worry; it is hard to follow and it doesn't make sense, except as 
sleight of hand. The important line is the last one: "These reserves . . . 
are matched by . . . deposits that did not exist before." The Chicago Fed 

How do open market purchases add to bank reserves and 
deposits? Suppose the Federal Reserve System, through its 


Chapter 18 - A Look Inside the Fed's Playbook 

trading desk at the Federal Reserve Bank of New York, buys 
$10,000 of Treasury bills from a dealer in U. S. government 
securities. In today's world of computerized financial transac- 
tions, the Federal Reserve Bank pays for the securities with a 
"telectronic" check drawn on itself. Via its "Fedwire" transfer 
network, the Federal Reserve notifies the dealer's designated 
bank (Bank A) that payment for the securities should be credited 
to (deposited in) the dealer's account at Bank A. At the same 
time, Bank A's reserve account at the Federal Reserve is credited 
for the amount of the securities purchase. The Federal Reserve 
System has added $10,000 of securities to its assets, which it has 
paid for, in effect, by creating a liability on itself in the form of 
bank reserve balances. These reserves on Bank A's books are 
matched by $10,000 of the dealer's deposits that did not exist before. 

What happens after that was explained in an article by Murray 
Rothbard titled "Fractional Reserve Banking," using a hypothetical 
that again is a bit easier to follow than the Fed's. In his example, $10 
million in Treasury bills are bought by the Fed from a securities dealer, 
who deposits the money in Chase Manhattan Bank. The $10 million 
are created with accounting entries, increasing the money supply by 
that sum; but this, says Rothbard, is "only the beginning of the infla- 
tionary, counterfeiting process": 

For Chase Manhattan is delighted to get a check on the Fed, and 
rushes down to deposit it in its own checking account at the Fed, 
which now increases by $10,000,000. But this checking account 
constitutes the "reserves" of the banks, which have now increased 
across the nation by $10,000,000. But this means that Chase 
Manhattan can create deposits based on these reserves, and that, 
as checks and reserves seep out to other banks . . . , each one can 
add its inflationary mite, until the banking system as a whole 
has increased its demand deposits by $100,000,000, ten times 
the original purchase of assets by the Fed. The banking system is 
allowed to keep reserves amounting to 10 percent of its deposits, which 
means that the "money multiplier" - the amount of deposits the banks 
can expand on top of reserves - is 10. A purchase of assets of $10 
million by the Fed has generated very quickly a tenfold, 
$100,000,000 increase in the money supply of the banking system 
as a whole. Interestingly, all economists agree on the mechanics of 
this process even though they of course disagree sharply on the 
moral or economic evaluation of that process. 4 


Web of Debt 

In order to pull all this off, the Fed has had to alter the meaning of 
certain words. "Reserves" are not what the word implies - money 
kept in a safe to pay claimants. Reserves are accounting entries at 
Federal Reserve Banks that allow commercial banks to make many 
times those sums in loans. In an article titled "Money and Myths," 
Carmen Pirritano writes that a "reserve account" is basically a second 
set of books kept at the Federal Reserve Bank. Thus in the Chicago 
Fed's example, the dealer acquired federal securities from the govern- 
ment and tendered them to the Federal Reserve, which "paid" by cred- 
iting the dealer's account, causing new money to magically appear as 
numbers at the dealer's bank. This new "deposit" was then added to 
the bank's "reserve balance" at its local branch of the Federal Reserve. 
These reserves were not "real" money kept at the commercial bank 
for paying depositors. They existed only as a liability on the Federal 
Reserve Bank's books. Pirritano maintains that the reserve accounts 
kept at the Federal Reserve Bank are just a system for keeping track of 
how much money commercial banks create. There is no limit to this 
money expansion, which banks can engage in to whatever extent they 
can get customers to take out new loans. He observes: 

"The Federal Reserve System Purposes and Functions" states 
that the Federal Reserve requires that all banks (as of 1980) must 
"hold a certain fraction of their deposits in reserve, either as 
cash in their vaults or as non-interest-bearing balances at the 
Federal Reserve." The term "non-interest-bearing balances at 
the Federal Reserve" means that "Reserve Accounts" are nothing 
more than bookkeeping tallies representing the portion of the 
member banks' deposit account balances that may be used as a 
base to extend new money creation credit. Member banks do 
not physically transfer ("deposit") a percentage of their demand 
deposit account balances to their Reserve accounts at their 
Federal Reserve Bank branch. ... J believe these "accounts" were 
designed to further the appearance of a gigantic system of "reserves" 
mandated by the Federal Reserve System to "force" prudent banking. 5 

Put less charitably, reserve accounts are a smoke and mirrors ac- 
counting trick concealing the fact that banks create the money they 
lend out of thin air, borrowing any "reserves" they need from other 
banks or the Fed, which also create the money out of thin air. Dis- 
turbing enough, but there is more .... 


Chapter 18 - A Look Inside the Fed's Playbook 

How Banks Create Their Own Investment Money 

The Chicago Fed continues with its example involving Bank A: 

If the process ended here, there would be no "multiple" 
expansion, i.e., deposits and bank reserves would have changed 
by the same amount. However, banks are required to maintain 
reserves equal to only a fraction of their deposits. Reserves in 
excess of this amount may be used to increase earning assets - 
loans and investments. 

Recall that the deposits in Bank A "did not exist" until the Fed 
conjured them up, something it did by "creating a liability on itself in 
the form of bank reserve balances." At a 10 percent reserve require- 
ment, 10 percent of these newly-created deposits are kept in "reserve." 
The other 90 percent are "excess reserves," which "may be used to 
increase earning assets," including not only "loans" but "investments" 
that pay a return to the bank. 

The Chicago Fed states that if business is active, the banks with 
excess reserves will probably have opportunities to lend these reserves. 
But if the banks do not have willing borrowers (indeed, even if they 
do), they can choose to invest the money. In effect, they are borrowing 
money created by themselves with accounting entries and investing it 
for their own accounts. The Chicago Fed states: 

Deposit expansion can proceed from investments as well as loans. 
Suppose that the demand for loans ... is slack. These banks 
would then probably purchase securities. . . . [Most] likely, these 
banks would purchase the securities through dealers, paying for 
them with checks on themselves or on their reserve accounts. These 
checks would be deposited in the sellers' banks. . . . [T]he net 
effects on the banking system are identical with those resulting from 
loan operations. 

The net effect when banks make loans is to expand their deposits, 
so this must also be the net effect when they invest the money for their 
own accounts: they expand the level of deposits, or create new money. 
How much of a bank's allotted "reserve balance" is invested rather 
than lent? Pirritano cites "Federal Reserve Statistical Release (H.8)" 
detailing the assets and liabilities of domestic banks, which puts the 
ratio of loans to investments at 7 to 3. Thus in the hypothetical given 
by Murray Rothbard, in which $10 million was created by the Fed 
and was fanned into $100 million as the money passed through the 


Web of Debt 

banking system, the $100 million would have created $70 million in 
loans to customers and $30 million in investments for the banks. 

Banks as Traders 

Commercial banks have traditionally invested conservatively in 
government securities, but that is not true of investment banks. The 
Glass-Steagall Act requiring commercial banking and investment 
banking to be conducted in separate institutions was repealed in 1999, 
following assurances that these banking functions would be separated 
by "Chinese walls" within the organizations.' But Chinese walls are 
paper thin, and there are significant differences between commercial 
and investment banks that make them uneasy partners. 6 Commercial 
banks have traditionally taken in deposits, issued commercial loans, 
and otherwise served their customers. Investment banks are not 
allowed to take in deposits or make commercial loans. Rather, they 
raise money for their clients by overseeing stock issuance and sales. 
Their more important business today, however, is something called 
"proprietary trading." An entry by that name in Wikipedia " defines 
proprietary trading as "a term used in investment banking to describe 
when a bank trades stocks, bonds, options, commodities, or other items 
with its own money as opposed to its customers' money, so as to make a 
profit for itself." The entry states: 

Although investment banks are usually defined as businesses 
which assist other business in raising money in the capital mar- 
kets (by selling stocks or bonds), in fact most of the largest invest- 
ment banks make the majority of their profit from trading activities. 

The potential for conflicts of interest was evident in 2007, when 
investment bank Goldman Sachs made a killing betting its own money 
against the subprime mortgage market at the same time that it was 

i "Chinese walls" are defined in Wikipedia as "information barriers imple- 
mented in firms to separate and isolate persons within a firm who make invest- 
ment decisions from persons within a firm who are privy to undisclosed material 
information which may influence those decisions ... to safeguard inside infor- 
mation and ensure there is no improper trading." 

ii The reliability of Wikipedia has been questioned, since it is researched by 
volunteers, but defenders note that inaccurate information is quickly corrected 
by other researchers; and it is an accessible online encyclopedia that gives infor- 
mation not readily found elsewhere. 


Chapter 18 - A Look Inside the Fed's Playbook 

selling "structured investment vehicles" laced with subprime debt to 
its clients. 7 

The conflicts of interest problem was discussed in a June 2006 article 
by Emily Thornton in Business Week Online titled "Inside Wall Street's 
Culture of Risk: Investment Banks Are Placing Bigger Bets Than Ever 
and Beating the Odds - At Least for Now." After discussing the new 
boom in bank trading, Thornton observed that investment bank 
wizards have so consistently beaten the odds that "[suspicions are 
rising that bank traders are acting on nonpublic information gleaned 
from their clients." Trading for the banks' own accounts has been 
criticized not only for suspected ethical violations but because it exposes 
the banks to enormous risks. Thornton writes: 

This trading boom, fueled by cheap money, is fundamentally 
different from the ones of the past. When traders last ruled 
Wall Street, during the mid-'90s, few banks put much of their 
own balance sheets at risk; most acted mainly as brokers, 
arranging trades between clients. Now, virtually all banks are 
making huge bets with their own assets on many more fronts, and 
using vast sums of borrowed money to jack up the risk even more. 

Where do these "vast sums of borrowed money" come from? 
Although investment banks are not allowed to take in deposits or make 
loans of imaginary money based on "fractional reserves," commercial 
banks are. Now that the lines between these two forms of banking 
have become blurred, it is not hard to envision bank traders having 
ready access to some very favorable loans. 
Thornton continues: 

[M]any investment banks now do more trading than all but the 
biggest hedge funds, those lightly regulated investment pools 
that almost brought down the financial system in 1998 when 
one of them, Long-Term Capital Management, blew up. What's 
more, banks are jumping into the realm of private equity, spending 
billions to buy struggling businesses as far afield as China that they 
hope to turn around and sell at a profit. 

Equity is ownership interest in a corporation, and the equity market 
is the stock market. These banks are not just investing in short-term 
Treasury bills on which they collect a modest interest, as commercial 
banks have traditionally done. They are buying whole businesses with 
borrowed money, and they are doing it not to develop the productive poten- 
tial of the business but just to reap a quick profit on resale. 


Web of Debt 

Leading the attack in this lucrative new field, says Thornton, is the 
very successful investment bank Goldman Sachs, headed until recently 
by Henry Paulson Jr. Paulson left the firm to become U.S. Treasury 
Secretary in June 2006, but neither Goldman nor its cronies, Thornton 
says, are showing signs of easing up: 

With $25 billion of capital under management, Goldman's private 
equity arm itself is one of the largest buyout firms in the world 
All of them are ramping up teams of so-called proprietary traders 
who play with the banks' own money. . . . Banks are paying up, 
offering some traders $10 million to $20 million a year. 8 

The practice of buying whole corporations in order to bleed them 
of their profits has been given the less charitable name of "vulture 
capitalism." Why the term fits was underscored in a January 2006 
article by Sean Corrigan called "Speculation in the Late Empire." He 

When the buy-out merchants and private equity partnerships 
can borrow what are effectively limitless sums of cheap, tax- 
advantaged debt with which to buy out corporate shareholders 
(not all of them willing sellers, remember); when they can then 
proceed to ruin the target business' balance sheet in a flash, by 
ordering payment of special dividends and by weighing it down 
with junk debt, in order to return their funds at the earliest 
juncture; when their pecuniary motives are mollified by so little 
pretense of undertaking any genuine entrepreneurial 
restructuring with which to enhance economic efficiency; when 
they can rake in an even greater haul of loot by selling the firm 
smartly back to the next debt-swollen suckers in line (probably 
into the little man's sagging pension funds via the inevitable, 
well-hyped IPC™); when they can scatter fees and commissions 
(and often political "contributions") liberally along the way - 
then we're clearly well past the point of reason or endorsement. 9 

Noting the "outrageously skewed" incomes made by bank traders 
at the top of the field — including Henry Paulson, who made over $30 
million at Goldman Sachs the previous year — Corrigan asks 

Why train to be a farmer or a pharmacologist, when you can 
join Merrill Lynch and become a millionaire in your mid-20s, 

Initial public offering. 


Chapter 18 - A Look Inside the Fed's Playbook 

using someone else's "capital" and benefiting from being an 
insider in the great Ponzi scheme in which we live? 

All major markets are now thought to be subject to the behind- 
the-scenes maneuverings of big financial players, and these 
manipulations are being done largely with what Corrigan calls 
"phantom money." A June 2006 article in Barron's noted that the 
bond market today is dominated by banks and government entities, 
and that they are not buying the bonds for their interest income. Rather, 
"The reality is that [they] are only interested in currency manipulation and 
market contrivement." 10 

To understand what is really going on behind the scenes, we need 
to understand the tools used by Big Money to manipulate markets. In 
the next chapter, we'll take a look at the investment vehicle known as 
the "short sale," which underlies many of those more arcane tools 
known as "derivatives." A massive wave of short selling was blamed 
for turning the Roaring Twenties into the Great Depression. The same 
sort of manipulations are going on today under different names .... 


Chapter 19 

"Lions, and tigers, and bears - oh my! Lions, and tigers, and 

- Dorothy lost in the forest, The Wizard ofOz 

The "Crash" that initiated the Great Depression wasn't a one- 
time occurrence. It continued for nearly four years after 1929, 
stoked by speculators who made huge profits not only on the market's 
meteoric rise but as it was plummeting. "Unrestrained financial 
exploitations have been one of the great causes of our present tragic 
condition," Roosevelt complained in 1933. A four-year industry-wide 
bear raid reduced the Dow Jones Industrial Average (a leading stock 
index) to only 10 percent of its former value. A bear raid is the practice 
of targeting stock for take-down, either for quick profits or for corporate 
takeover. Whenever the market decline slowed after the 1929 crash, 
speculators would step in to sell millions of dollars worth of stock they 
did not own but had ostensibly borrowed just for purposes of sale, 
using the device known as the "short sale." When done on a large 
enough scale, short selling can actually force prices down, allowing 
assets to be picked up very cheaply. 

Here is how it works: stock prices are set on the trading floor by 
traders (those people you see wildly yelling, waving and signaling to 
each other on TV), whose job is to match buyers with sellers. Short 
sellers willing to sell at any price are matched with the low-ball buy 
orders. Since stock prices are set according to supply and demand, 
when sell orders overwhelm buy orders, the price drops. The short 
sellers then buy the stocks back at the lower price and pocket the 
difference. Today, speculators have to drop the price only enough to 


Chapter 19 - Bear Raids and Short Sales 

trigger the automatic stop loss orders and margin calls 1 of the big mutual 
funds and hedge funds." A cascade of sell orders follows, and the price 

The short sale is explained by market analyst Richard Geist using 
a simple analogy: 

Pretend that you borrowed your neighbor's lawn mower, which 
your neighbor generously says you may keep for a couple of weeks 
while he's on vacation. You're thinking of buying a lawn mower 
anyway so you've been researching the latest sales and have seen 
your neighbor's lawn mower on sale for $300, marked down 
from $500. While you're mowing your lawn, a passerby stops 
and offers to buy the lawn mower you're using for $450. You 
sell him the lawn mower, then go out and buy the same one on 
sale for $300 and return it to your neighbor when he returns. 
Only now you've made $150 on the deal. 

Applying this analogy to a hypothetical stock trade, Geist writes: 

You believe Amazon is overvalued and its price is going to fall. 
So as a short seller, you borrow Amazon stock which, like the 
lawn mower, you don't own, from a broker and sell it into the 
market. . . .You borrow and sell 100 shares of Amazon at $50 
per share, yielding a gain, exclusive of commissions, of $5,000. 
Your research proves correct and a few weeks later Amazon is 
selling for $35 per share. You then buy 100 shares of Amazon 
for $3500 and return the 100 shares to the broker. You then 
have closed your position, and in the meantime you've made 

i A stop loss order is an order to sell when the price reaches a certain threshold. 
A margin call is a demand by a broker to a customer trading on margin (trading on 
credit or with borrowed funds) to add funds or securities to his margin account 
to bring it up to the percentage of the stock price required as a down payment by 
federal regulations. Most traders sell rather than pay the additional money. 

u A mu tualfund is a company that brings together money from many people 
and invests it. Hedge funds are investment companies that use high-risk tech- 
niques, such as borrowing money and selling short, in an effort to make extraor- 
dinary capital gains for their investors. 


Web of Debt 

The Hazards of Analogies 

It sounds harmless enough when you are borrowing your neighbor's 
lawn mower with his "generous permission." But when short sellers 
sell stock they don't own, they don't actually get the permission of the 
real owners; and selling your neighbor's lawn mower won't affect 
lawn mower prices at Sears. In the stock market, by contrast, prices 
fluctuate from moment to moment according to the number of shares 
for sale. When millions of shares are "sold" without ever leaving the 
possession of their real owners, these "virtual" sales can force down 
the price, even when there has been no change in the underlying asset 
to justify the drop. Indeed, this can and often does happen when the 
news about the stock is good, because speculators want to take down 
the price so they can buy in cheaply. The price is not responding to 
"free market forces." It is responding to speculators with the collusive 
battering power to overwhelm the market with sell orders — orders 
that are actually phony, because the "sellers" don't own the stock. 
Like fractional reserve lending, in which the same "reserves" are lent 
many times over, short selling has been called a fraud, one that dam- 
ages the real shareholders and the company. Analyst David Knight 
explains it like this: 

Short selling is a form of counterfeiting. m When a company is 
founded, a certain number of shares are created. The entire 
value of that company is represented by that fixed number of 
shares. When an investor buys some of those shares and leaves 
them registered in his broker's street name, his broker makes 
those same shares available for someone else to sell short. Once 
sold short, there are two investors owning the same shares of stock. 

The price of stock shares are set by market forces, i.e., supply 
and demand. When there is a fixed supply of something, the 
price adjusts until demand is met. But when supply is not fixed, 
as when something is counterfeited, supply will exceed demand 
and the price will fall. Price will continue to fall as long as supply 
continues to expand beyond demand. Furthermore, price decline 
is not a linear function of supply expansion. At some point, if 
supply continues to expand beyond demand, the "bottom will 
fall out of the market," and prices will plunge. 2 

"' Court terfeit: to make a copy of, usually with the intent to defraud; to carry on 
a deception. 


Chapter 19 - Bear Raids and Short Sales 

The lending of shares by a broker who holds them in trust for his 
customers is comparable to the goldsmiths' lending of gold held in 
trust for his depositors. The broker's customers may have agreed to 
lend out their shares in the fine print of their brokerage contracts, but 
they are probably not aware of it. They could avoid having their shares 
lent out by taking physical possession of the stock; but if they leave the 
stock with the broker (as nearly everyone does), it is in "street name" 
and can be lent out and "sold" without the real owners' knowledge, 
although they still believe in the company and have no intention of 
flooding the market with their shares. 

An April 2006 article in Bloomberg Markets highlighted another 
serious problem with short selling. The short seller is actually allowed to 
vote the shares at shareholder meetings. To avoid having to reveal what 
is going on, stock brokers send proxies to the "real" owners as well; 
but that means there are duplicate proxies floating around. Just as 
bankers get away with lending the same money over and over because 
they know most people won't come to collect the cash, brokers know 
that many shareholders won't go to the trouble of voting their shares; 
and when too many proxies do come in for a particular vote, the totals 
are just reduced proportionately to "fit." But that means the real votes 
of real stock owners may be thrown out. Hedge funds are suspected 
of engaging in short selling just to vote on particular issues in which 
they are interested, such as hostile corporate takeovers. Since many 
shareholders don't send in their proxies, interested short sellers can 
swing the vote in a direction that is not in the best interests of those 
with a real stake in the corporation. 3 

Some of the damage caused by short selling was blunted by the 
Securities Act of 1933, which imposed an "uptick" rule and forbade 
"naked" short selling. The uptick rule required a stock's price to be 
higher than its previous sale price before a short sale could be made, 
preventing a cascade of short sales when stocks were going down. 
But hedge funds managed to avoid the rule by trading offshore, where 
they were unregulated. (See Chapter 20.) And in July 2007, the uptick 
rule was repealed. 4 "Naked" short selling is the practice of selling 
stocks short without either owning or borrowing them. Like many of 
the regulations put in place during Roosevelt's New Deal, that rule 
too has been seriously eroded .... 


Web of Debt 

The Nefarious, Ubiquitous Naked Short Sale 

According to a November 2005 article in Time Magazine : 

[N]aked short selling is illegal, barring certain exceptions for brokers 
trying to maintain an orderly market. In naked short selling, you 
execute the sale without borrowing the stock. The SEC noted in 
a report last year the "pervasiveness" of the practice. When not 
caught, this kind of selling has no limits and allows a seller to drive 
down a stock. 5 

A May 2004 Dow Jones report confirmed that naked short selling 
is "a manipulative practice that can drive a company's stock price 
sharply lower." 6 The exception that has turned the rule into a sham is 
a July 2005 SEC ruling allowing the practice by "market makers." A 
market maker is a bank or brokerage that stands ready to buy and sell 
a particular stock on a continuous basis at a publicly quoted price. 
The catch is that market makers are the brokers who actually do most of 
the buying and selling of stock today. Ninety-five percent of short sales 
are now done by broker-dealers and market makers. 7 Market making 
is one of the lucrative pursuits of those ten giant U.S. banks called 
"money center banks," which currently hold almost half the country's 
total banking assets. (More on this in Chapter 34.) 

A story run on FinancialWire in March 2005 underscored the per- 
vasiveness and perniciousness of naked short selling. A man named 
Robert Simpson purchased all of the outstanding stock of a small com- 
pany called Global Links Corporation, totaling a little over one million 
shares. He put all of this stock in his sock drawer, then watched as 60 
million of the company's shares traded hands over the next two days. 
Every outstanding share changed hands nearly 60 times in those two days, 
although they were safely tucked away in his sock drawer. The incident 
substantiated allegations that a staggering number of "phantom" shares 
are being traded around by brokers in naked short sales. Short sellers 
are expected to "cover" by buying back the stock and returning it to 
the pool, but Simpson's 60 million shares were obviously never bought 
back, since they were not available for purchase; and the same thing 
is believed to be going on throughout the market. 8 

The role of market makers is supposedly to provide liquidity in the 
markets, match buyers with sellers, and ensure that there will always 
be someone to supply stock to buyers or to take stock off sellers' hands. 
The exception allowing them to engage in naked short selling is justi- 
fied as being necessary to allow buyers and sellers to execute their 


Chapter 19 - Bear Raids and Short Sales 

orders without having to wait for real counterparties to show up. But 
if you want potatoes or shoes and your local store runs out, you have 
to wait for delivery. Why is stock investment different? 

It has been argued that a highly liquid stock market is essential to 
ensure corporate funding and growth. That might be a good argu- 
ment if the money actually went to the company, but that is not where 
it goes. The issuing company gets the money only when the stock is 
sold at an initial public offering (IPO). The stock exchange is a second- 
ary market - investors buying from other stockholders, hoping they 
can sell the stock for more than they paid for it. Basically, it is gam- 
bling. Corporations have an easier time raising money through new 
IPOs if the buyers know they can turn around and sell their stock 
quickly; but in today's computerized global markets, real buyers should 
show up quickly enough without letting brokers sell stock they don't 
actually have to sell. 

Short selling is sometimes justified as being necessary to keep a 
brake on the "irrational exuberance" that might otherwise drive 
popular stocks into dangerous "bubbles." But if that were a necessary 
feature of functioning markets, short selling would also be rampant in 
the markets for cars, television sets and computers, which it obviously 
isn't. The reason it isn't is that these goods can't be "hypothecated" or 
duplicated on a computer screen the way stock shares can. Like 
fractional reserve lending, short selling is made possible because the 
brokers are not dealing with physical things but are simply moving 
numbers around on a computer monitor. Any alleged advantages to 
a company from the liquidity afforded by short selling are offset by 
the serious harm this sleight of hand can do to companies targeted for 
take-down in bear raids. 

The Stockgate Scandal 

The destruction that naked short selling can do was exposed in a 
July 2004 Investors Business Daily articled called "Stockgate," which 
detailed a growing scandal involving market makers and their clearing 
agency the Depository Trust Company (DTC). The DTC is responsible 
for holding securities and for arranging for the receipt, delivery, and 
monetary settlement of securities transactions. The DTC is an arm of 
the Depository Trust and Clearing Corporation (DTCC), a private 
conglomerate owned collectively by broker-dealers and banks. The 
lawsuits called "Stockgate" alleged a coordinated effort by hedge 


Web of Debt 

funds, broker-deals and market makers to strip small and medium- 
sized public companies of their value. In comments before the 
Securities and Exchange Commission, C. Austin Burrell, a litigation 
consultant for the plaintiffs, maintained that "illegal Naked Short 
Selling has stripped hundreds of billions, if not trillions, of dollars from 
American investors." Over the six-year period before 2004, he said, 
the practice resulted in over 7,000 public companies being "shorted 
out of existence." Burrell maintained that as much as $1 trillion to $3 
trillion may have been lost to naked short selling, and that more than 
1,200 hedge fund and offshore accounts have been involved in the 

The DTC's role is supposed to be to bring efficiency to the securities 
industry by retaining custody of some 2 million securities issues, 
effectively "dematerializing" most of them so that they exist only as 
electronic files rather than as countless pieces of paper. Once 
"dematerialized," the shares can be "re-hypothecated," something the 
Stockgate plaintiffs say is just a fancy term for "counterfeiting." They 
allege that the DTCC has an enormous pecuniary interest in the short 
selling scheme, because it gets a fee each time a journal entry is made 
in the "Stock Borrow Program." According to the court filings, almost 
one billion dollars annually are received by the DTCC for its Stock 
Borrow Program, in which the DTCC lends out many multiples of the 
actual certificates outstanding in a stock. Worse, the SEC itself 
reportedly has a stake in the deal, since it receives a transaction fee for 
each transaction facilitated by these loans of non-existent certificates. 
The SEC was instituted during the Great Depression specifically to 
prevent this sort of corrupt practice. The Investors Business Daily 
article observed: 

The largely unregulated DTC has become something of a defacto 
Czar presiding over the entire U.S. markets system .... And, as 
the SEC s July 28 ruling indicates, its monopoly over the electronic 
trading system appears even to be protected. The Depository 
Trust and Clearing Corp.'s two preferred shareholders are the 
New York Stock Exchange and the NASD, a regulatory agency 
that also owns the NASDAQ (NDAQ) and the embattled 
American Stock Exchange! ... In an era when corporate 
governance is the primary interest for the SEC and state 
regulators, the DTCC is hardly a role model. Its 21 directors 
represent a virtual litany of conflict .... The scandal has embroiled 
hundreds of companies and dozens of brokers and marketmakers, in a 


Chapter 19 - Bear Raids and Short Sales 

web of international intrigue, manipulative short-selling and cross- 
border actions and denials. 

A web of international intrigue and coordinated manipulation — 
the image recalls the "spider webbing" described by Hans Schicht. 
The Stockgate plaintiffs expect to show that the "hypothecation" or 
counterfeiting of unregistered shares is a specific violation of the 
Securities Act of 1933 barring the "Sale of Unregistered Securities." 
Restrictions on short selling were put into the Securities Acts of 1933 
and 1934, according to Burrell, because of first-hand evidence that 
the "sheer scale of the crashes [after 1929] was a direct result of intentional 
manipulation of U.S. markets through abusive short selling." He maintains: 

There are numerous cases of a single share being lent ten or 
many more times, giving rise to the complaint that the DTCC 
has been electronically counterfeiting just as was done via printed 
certificates before the Crash. . . . Shares could be electronically 
created/counterfeited/kited without a registration statement 
being filed, and without the underlying company having any 
knowledge such shares are being sold or even in existence. 9 

In a website devoted to the Stockgate scandal called "The Faulking 
Truth," Mark Faulk wrote in April 2006 that the lawsuits and repeated 
calls for investigation and reform have made little headway and have 
been denied media attention. The SEC has imposed only minor 
penalties for infractions, which are perceived by the defendants as 
being merely a cost of doing business. 10 Like with antitrust regulation 
in the Gilded Age, the fox has evidently gotten inside the SEC hen 
house. The big money cartels the agency was designed to control are 
now pulling its strings. 

Patrick Byrne is president of a company called, 
which has been an apparent target of naked short selling. In a reveal- 
ing presentation called "The Darkside of the Looking Glass: The Cor- 
ruption of Our Capital Markets," he says the SEC has the data on 
how much naked short selling is going on, but it refuses to reveal the 
numbers, the players or the plays. Why? The information can hardly 
be called a matter of national security. The SEC calls it "proprietary 
information" that would reveal the short sellers' trading strategies if 
exposed. Byrne translates this to mean that if the thieves were found 
out, they could not keep stealing. Why are the regulators protecting 
them? He offers two theories: either they are looking forward to being 
thieves themselves when they go back into private practice, or they 


Web of Debt 

are afraid that if they blow the whistle, the whole economy will come 
crashing down, along with the banks that are arranging the deals. 11 

Financial Weapons of Mass Destruction? 

Short selling is the modern version of the counterfeiting scheme 
used to bring down the Continental in the 1770s. When a currency is 
sold short, its value is diluted just as it would be if the market were 
flooded with paper currency. The short sale is the basis of many of 
those sophisticated trades called "derivatives," which have become 
weapons for destroying competitor businesses by parasitic mergers 
and takeovers. Billionaire investor Warren Buffett calls derivatives 
"financial weapons of mass destruction." 12 The term fits not only 
because these speculative bets are very risky for investors but because 
big institutional investors can use them to manipulate markets, cause 
massive currency devaluations, and force small vulnerable countries 
to do their bidding. Derivatives have been used to destroy the value of 
the national currencies of competitor countries, allowing national assets 
to be picked up at fire sale prices, just as the assets of the American 
public were snatched up by wealthy insiders after the crash of 1929. 
Defenders of free markets blame the targeted Third World countries 
for being unable to manage their economies, when the fault actually 
lies in a monetary scheme that opens their currencies to manipulation 
by foreign speculators who have access to a flood of "phantom money" 
borrowed into existence from foreign banks. 

To clarify all this, we'll to take another short detour into the shady 
world of "finance capitalism," to shed some light on the obscure topic 
of derivatives and the hedge funds that largely trade in them. 

' The term "Third World" is now an anachronism, since there is no longer a 
"Second World" (the Soviet bloc). But the term is used here because it has a 
popularly understood meaning and is still widely used, and because the alterna- 
tives - "developing world" and "underdeveloped world" - may be misleading. 
Citizens of ancient Third World civilizations tend to consider their cultures more 
"developed" than some in the First World. 


Chapter 20 



"What kind of a horse is that? I've never seen a horse like that 

"He's the Horse of a Different Color you've heard tell about." 

- The Guardian of the Gate to Dorothy, 
The Wizard of Oz 

Just as a painted horse is still a horse, so derivatives and 
the hedge funds that specialize in them have been called merely 
a disguise, something designed to look "different enough from the last 
time so no one realizes what is happening." John Train, writing in 
The Financial Times, used this colorful analogy: 

[I]t is like the floor show in a seedy nightclub. A sequence of 
girls trots on the scene, first a collection of Apaches, then some 
ballerinas, then cowgirls and so forth. Only after a while does 
the bemused spectator realize that, in all cases, they were the 

same girls in slightly different costumes [T]he so-called hedge 

fund actually was an excuse for a margin account. 1 

Hedge funds are private funds that pool the assets of wealthy in- 
vestors, with the aim of making "absolute returns" — making a profit 
whether the market goes up or down. To maximize their profits, they 
typically use credit borrowed against the fund's assets to "leverage" 
their investments. Leverage is the use of borrowed funds to increase 
purchasing power. The greater the leverage, the greater the possible 
gain (or loss). In futures trading, this leverage is called the margin. 
Leveraging on margin, or by borrowing money, allows investors to 
place many more bets than if they had paid the full price. 


Chapter 20 - Hedge Funds and Derivatives 

In the 1920s, wealthy investors engaged in "pooling" - combining 
their assets to influence the markets for their collective benefit. Like 
trusts and monopolies, pooling was considered to be a form of collu- 
sive interference with the normal market forces of supply and demand. 
Hedge funds are the modern-day variants of this scheme. They are 
usually run in off-shore banking centers such as the Cayman Islands 
to avoid regulation. Off-shore funds are exempt from margin require- 
ments that restrict trading on credit, and from uptick rules that limit 
short sales to assets that are rising in price. 

Hedge funds were originally set up to "hedge the bets" of inves- 
tors, insuring against currency or interest rate fluctuations; but they 
quickly became instruments for manipulation and control. Many of 
the largest hedge funds are run by former bank or investment bank 
dealers, who have left with the blessings of their former employers. 
The banks' investment money is then placed with the hedge funds, 
which can operate in a more unregulated environment than the banks 
can themselves. Hedge funds are now often responsible for over half the 
daily trading in the equity markets, due to their huge size and the huge 
amounts of capital funding them. 2 That gives them an enormous 
amount of control over what the markets will do. In the fall of 2006, 
8,282 of the 9,800 hedge funds operating worldwide were registered 
in the Cayman Islands, a British Overseas Territory with a population 
of 57,000 people. The Cayman Islands Monetary Authority gives each 
hedge fund at registration a 100-year exemption from any taxes, shel- 
ters the fund's activity behind a wall of official secrecy, allows the 
fund to self-regulate, and prevents other nations from regulating the 
funds. 3 

Derivatives are key investment tools of hedge funds. Derivatives 
are basically side bets that some underlying investment (a stock, 
commodity, market, etc.) will go up or down. They are not really 
"investments," because they don't involve the purchase of an asset. 
They are outside bets on what the asset will do. All derivatives are 
variations on futures trading, and all futures trading is inherently 
speculation or gambling. The more familiar types of derivatives include 
"puts" (betting the asset will go down) and "calls" (betting the asset 
will go up). Over 90 percent of the derivatives held by banks today, 
however, are "over-the-counter" derivatives - investment devices 
specially tailored to financial institutions, often having exotic and 
complex features, not traded on standard exchanges. They are not 
regulated, are hard to trace, and are very hard to understand. 4 Some 


Web of Debt 

critics say they are impossible to understand, because they were 
designed to be so complex and obscure as to mislead investors. 5 

At one time, tough rules regulated speculation of this sort. The 
Glass-Steagall Act passed during the New Deal separated commercial 
banking from securities trading; and the Commodities Futures Trad- 
ing Commission (CFTC) was created in 1974 to regulate commodity 
futures and option markets and to protect market participants from 
price manipulation, abusive sales practices, and fraud. But again the 
speculators have managed to get around the rules. Derivative traders 
claim they are not dealing in "securities" or "futures" because noth- 
ing is being traded; and just to make sure, they induced Congress to 
empower the head of the CFTC to grant waivers to that effect, and 
they set up offshore hedge funds that remained small, unregistered 
and unregulated. They also had the Glass-Steagall Act repealed. 

A Bubble on a Ponzi Scheme 

Executive Intelligence Review (EIR ), The New Federalist and The 
American Almanac are publications associated with Lyndon 
LaRouche, a political figure who is personally controversial but whose 
research staff was described by a former senior staffer of the National 
Security Council as "one of the best private intelligence services in the 
world." 6 Their writings on the derivatives crisis are quite colorful and 
readable. In a 1998 interview, John Hoefle, the banking columnist for 
EIR, clarified the derivatives phenomenon like this: 

During the 1980s, you had the creation of a huge financial bubble. 
. . . [Y]ou could look at that as fleas who set up a trading empire 
on a dog. . . . They start pumping more and more blood out of 
the dog to support their trading, and then at a certain point, the 
amount of blood that they're trading exceeds what they can 
pump from the dog, without killing the dog. The dog begins to 
get very sick. So being clever little critters, what they do, is they 
switch to trading in blood futures. And since there's no 
connection - they break the connection between the blood 
available and the amount you can trade, then you can have a 
real explosion of trading, and that's what the derivatives market 
represents. And so now you've had this explosion of trading in 
blood futures which is going right up to the point that now the 
dog is on the verge of dying. And that's essentially what the 
derivatives market is. It's the last gasp of a financial bubble. 7 


Chapter 20 - Hedge Funds and Derivatives 

What has broken the connection between "the blood available and 
the amount you can trade" is that derivatives are not assets. They are 
just bets on what the asset will do, and the bet can be placed with very 
little "real" money down. Most of the money is borrowed from banks 
that create it on a computer screen as it is lent. The connection with 
reality has been severed so completely that the market for over-the- 
counter derivatives has now reached many times the money supply of 
the world. Since these private bets are unreported and unregulated, 
nobody knows exactly how much money is riding on them. How- 
ever, the Bank for International Settlements (BIS) reported that in the 
first half of 2006, the "notional value" of derivative trades had soared 
to a record $370 trillion; and by December 2007, the figure was up to 
a breathtaking $682 trillion. 8. 

The notional value of a derivative is a hypothetical number described 
as "the number of units of an asset underlying the contract, multi- 
plied by the spot price of the asset." Synonyms for "notional" include 
"fanciful, not based on fact, dubious, imaginary." Just how fanciful 
these values are is evident from the numbers: $682 trillion is over 50 
times the $13 trillion gross domestic product (GDP) of the entire U.S. 
economy. In 2006, the total GDP of the world was only $66 trillion — 
one-tenth the "notional"value of derivative trade in 2007. In a Sep- 
tember 2006 article in MarketWatch, Thomas Kostigen wrote: 

[l]t's worth wondering how so much extra value can be squeezed out 
of instruments that are essentially fake. . . . Wall Street manufactures 
these products and trades them in a rather shadowy way that 
keeps the average investor in the dark. You cannot exactly look 
up the price of an equity derivative in your daily newspaper's 
stock table. . . . [I]t wouldn't take all that much to create a domino 
effect of market mishap. And there is no net. The Securities 
Investor Protection Corporation, which insures brokerage 
accounts in the event of a brokerage-firm failure, recently 
announced its reserves. It has about $1.38 billion. That may 
sound like a lot. Compared with half a quadrillion, it's a 
pittance. Scary but true. 9 

How are these astronomical sums even possible? The answer, 
again, is that derivatives are just bets, and gamblers can bet any amount 
they want. Gary Novak is a scientist with a website devoted to simpli- 
fying complex issues. He writes, "It's like two persons flipping a coin 
for a trillion dollars, and afterwards someone owes a trillion dollars 


Web of Debt 

which never existed." 9 He calls it "funny money." Like the Missis- 
sippi Bubble, the derivatives bubble is built on something that doesn't 
really exist; and when the losers cannot afford to pay up on their 
futures bets, the scheme must collapse. Either that, or the taxpayers 
will be saddled with the bill for the largest bailout in history. 

In a report presented at the request of the House Committee on 
Banking, Finance and Urban Affairs in 1994, Christopher White used 
some other vivid imagery for the derivatives affliction. He wrote: 

The derivatives market ... is the greatest bubble in history. It 
dwarfs the Mississippi Bubble in France and the South Sea Island 
bubble in England. This bubble, like a cancer, has penetrated and 
taken over the entirety of our banking and credit system; there is no 
major commercial bank, investment bank, mutual fund, etc. that 
is not dependent on derivatives for its existence. These 
derivatives suck the life's blood out of our economy. Our farms, 
our factories, our nation's infrastructure, our living standards are 
being sucked dry to pay off interest payments, dividend yields as well 
as other earnings on the bubble. 11 

How speculation in derivatives draws much-needed capital away 
from domestic productivity was explained by White with another 

It would be like going to the horse races to bet, not on the race, 
but on the size of the pot. Who would care about what's involved 
with getting the runners to the starting gate? 

Since the gamblers don't care who wins, they aren't interested in 
feeding the horses or hiring stable hands. They are only interested in 
money making money. Today more money can be had at less risk by 
speculation in derivatives than by investing in the growth of a business, 
and this is particularly true if you are a very big bank with the ability 
to influence the way the bet goes. The Office of the Comptroller of the 
Currency reported that in mid-2006, there were close to 9,000 
commercial and savings banks in the United States; yet 97 percent of 
U.S. bank-held derivatives were concentrated in the hands of just five 
banks. Topping the list were JPMorgan Chase and Citibank, the citadels 
of the Morgan and Rockefeller empires. 12 


Chapter 20 - Hedge Funds and Derivatives 

Derivative Wars 

The seismic power of the new derivative weapons was demon- 
strated in 1992, when George Soros and his giant hedge fund Quan- 
tum Group, backed by Citibank and other powerful institutional specu- 
lators, used derivatives to collapse the currencies of Great Britain and 
Italy in a single day. The European Monetary System was taken down 
with them. According to White: 

They showed that day that the speculative cancer that had been 
unleashed had grown beyond the point that monetary authorities 
could control. Farmers who have been ruined by short-sellers 
on commodities markets know what this is all about: selling what 
you do not own in order to buy it back later for less. . . . These are 
instruments of financial warfare, deployed against nations and the 
populations in much the same way the commodity market short-seller 
has been deployed to bankrupt the farmer. 13 

More than $60 billion were poured into the 1992 onslaught against 
European currencies, and this money was largely borrowed from giant 
international banks. A 1997 report by an IMF research team confirmed 
that to fuel a speculative attack, hedge funds needed the backing of 
the banks, since few private parties were willing or able to make those 
very large and very risky investments. 14 By 1997, hedge funds had an 
estimated $100 billion in assets, which could be leveraged five to ten 
times, giving them up to a trillion dollars in battering power. An article 
in The Economist observed: 

That may sound a lot, particularly if hedge funds leverage their 
capital. But consider that the assets of rich-country institutional 
investors exceed $20 trillion. Hedge funds are bit players compared 
with banks, mutual or pension funds, many of which engage in exactly 
the same types of speculation. 15 

George Soros raised this defense himself, when his giant hedge 
fund was blamed for the Asian currency crisis of 1997-98. In The 
Crisis of Global Capitalism, he wrote: 

There has . . . been much discussion of the role of hedge funds in 
destabilizing the financial system ... I believe the discussion is 
misdirected. Hedge funds are not the only ones to use leverage; 

the proprietary trading desks of commercial and investment banks 
are the main players in derivatives and swaps. . . . [Hjedge funds as 
a group did not equal in size the proprietary trading desks of banks 
and brokers .... 16 


Web of Debt 

Between 1996 and 2005, the number of hedge funds more than 
doubled, and their capital grew from $200 billion to over $1 trillion. 
Between 1987 and 2005, derivatives betting on international interest 
rate and currencies grew from $865 billion to $201.4 trillion. This 
explosion in derivative bets was matched on the downside by an 
explosion in risk. When a mega-corporation or a debtor nation goes 
bankrupt, the banks that are derivatively hedging its bets can go 
bankrupt too. When Russia defaulted on its debts, LTCM went 
bankrupt and threatened to take the banks with interlocking 
investments down with it. A November 2005 Bloomberg report 

The $12.4 trillion market for credit derivatives is dominated by 
too few banks, making it vulnerable to a crisis if one of them 
fails to pay on contracts that insure creditors from companies 
defaulting .... JPMorgan Chase & Co., Deutsche Bank AG, 
Goldman Sachs Group Inc. and Morgan Stanley are the most 
frequent traders in a market where the top 10 firms account for 
more than two-thirds of the debt-insurance contracts bought 
and sold. 17 

John Hoefle warns that the dog has already run out of blood. He 

We are on the verge of the biggest financial blowout in centuries, 
bigger than the Great Depression, bigger than the South Sea 
bubble, bigger than the Tulip bubble. The derivatives bubble, in 
which Citicorp, Morgan, and the other big New York banks are 
unsalvageably overexposed, is about to pop. The currency 
warfare operations of the Fed, George Soros, and Citicorp have 
generated billions of dollars in profits, but have destroyed the 
financial system in the process. The fleas have killed the dog, and 
thus they have killed themselves. 18 

How Can a Bank Go Bankrupt? 

But, you may ask, how can these banks go bankrupt? Don't they 
have the power to create money out of thin air? Why doesn't a bank 
with bad loans on its books just write them off and carry on? 

British economist Michael Rowbotham explains that under the 
accountancy rules of commercial banks, all banks are obliged to balance 
their books, making their assets equal their liabilities. They can create 


Chapter 20 - Hedge Funds and Derivatives 

all the money they can find borrowers for, but if the money isn't paid 
back, the banks have to record a loss; and when they cancel or write 
off debt, their total assets fall. To balance their books by making their 
assets equal their liabilities, they have to take the money either from 
profits or from funds invested by the bank's owners; and if the loss is 
more than the bank or its owners can profitably sustain, the bank will 
have to close its doors. 19 Note that the bank's owners are not those 
multi-million dollar CEOs who control the company and pay 
themselves generous bonuses when they generate big new loans and 
fees, or the interlocking directorships that shower financial favors on 
their cronies. The owners are the shareholders. Like with the recent 
exploitation of the bankrupt energy giant Enron, the profiteers plunging 
ahead with reckless risk-taking are the management, who can take 
their winnings and walk away, leaving the shareholders and the 
employees holding the bag. 

Individual profiteering aside, however, banks are clearly taking a 
risk when they extend credit. Bankers will therefore argue that they 
deserve the interest they get on these loans, even if they did conjure 
the money out of thin air. Somebody has to create the national money 
supply. Why not the bankers? 

One problem with the current system is that the government itself 
has been seduced into borrowing money created out of nothing and 
paying interest on it, when the government could have created the 
funds itself, debt- and interest-free. In the case of government loans, 
the banks take virtually no risk, since the government is always good 
for the interest; and the taxpayers get saddled with a crippling debt 
that could have been avoided. 

Another problem with the fractional reserve system is simply in 
the math. Since all money except coins comes into existence as a debt 
to private banks, and the banks create only the principal when they 
make loans, there is never enough money in the economy to repay 
principal plus interest on the nation's collective debt. When the money 
supply was tethered to gold, this problem was resolved through 
periodic waves of depression and default that wiped the slate clean 
and started the cycle all over again. Although it was a brutal system 
for the farmers and laborers who got wiped out, and it allowed a 
financier class to get progressively richer while the actual producers 
got poorer, it did succeed in lending a certain stability to the money 
supply. Today, however, the Fed has taken on the task of preventing 
depressions, something it does by pumping more and more credit- 


Web of Debt 

money into the economy by funding a massive federal debt that no 
one ever expects to have to repay; and all this credit-money is advanced 
at interest. At some point, the interest bill alone must exceed the 
taxpayers' ability to pay it; and according to U.S. Comptroller General 
David Walker, that day of reckoning is only a few years away. 20 We 
have reached the end of the line on the debt-money train and will 
have to consider some sort of paradigm shift if the economy is to 

A third problem with the current system is that giant interna- 
tional banks are now major players in global markets, not just as lend- 
ers but as investors. Banks have a grossly unfair advantage in this 
game, because they have access to so much money that they can influ- 
ence the outcome of their bets. If you the individual investor sell a 
stock short, your modest investment won't do much to influence the 
stock's price; but a mega-bank and its affiliates can short so much 
stock that the value plunges. If the bank is one of those lucky institu- 
tions considered "too big to fail," it can rest easy even if its bet does go 
wrong, since the FDIC and the taxpayers will bail it out from its folly. 
In the case of international loans, the International Monetary Fund 
will bail it out. In Sean Corrigan's descriptive prose: 

[W]hen financiers and traders get paid enough to make Croesus 
kvetch for taking wholly asymmetric risks with phantom capital 
- risks underwritten by government institutions like the Fed and 
the FDIC .... - this is not exactly a fair card game. 21 

For every winner in this game played with phantom capital, there 
is a loser; and the biggest losers are those Third World countries that 
have been seduced into opening their financial markets to currency 
manipulation, allowing them to be targeted in powerful speculative 
raids that can and have destroyed their currencies and their econo- 
mies. Lincoln's economist Henry Carey said that the twin weapons 
used by the British empire to colonize the world were the "gold stan- 
dard" and "free trade." The gold standard has now become the 
petrodollar standard, as we'll see in the next chapter; but the game is 
still basically the same: crack open foreign markets in the name of 
"free trade," take down the local currency, and put the nation's assets 
on the block at fire sale prices. The first step in this process is to induce 
the country to accept foreign loans and investment. The loan money 
gets dissipated but the loans must be repaid. In the poignant words of 
Brazilian President Luiz Inacio Lula da Silva: 


Chapter 20 - Hedge Funds and Derivatives 

The Third World War has already started. . . . The war is tearing 
down Brazil, Latin America, and practically all the Third World. 
Instead of soldiers dying, there are children. It is a war over the 
Third World debt, one which has as its main weapon, interest, a 
weapon more deadly than the atom bomb, more shattering than 
a laser beam. 22 

The Third World is fighting back, in a war it thinks was started by 
the First World; but the governments of the First World are actually 
victims as well. As Dr. Quigley revealed, the secret of the international 
bankers' success is that they have managed to control national money 
systems while letting them appear to be controlled by governments. 23 
The U.S. government itself is the puppet of invisible puppeteers .... 


Section III 


"If I cannot harness you," said the Witch to the Lion, speaking 
through the bars of the gate, "I can starve you. You shall have nothing 
to eat until you do as I wish." 

- The Wonderful Wizard ofOz, 
"The Search for the Wicked Witch" 

Chapter 21 

"Once," began the leader, "we were a free people, living happily 
in the great forest, flying from tree to tree, eating nuts and fruit, and 
doing just as we pleased without calling anybody master. . . . [Now] 
we are three times the slaves of the owner of the Golden Cap, whosoever 
he may be." 

- The Wonderful Wizard ofOz , 
"The Winged Monkeys " 

The Golden Cap suggested the gold that was used 
by international financiers to colonize indigenous populations 
in the nineteenth century. The gold standard was a necessary step in 
giving the bankers' "fractional reserve" lending scheme legitimacy, 
but the ruse could not be sustained indefinitely. Eleazar Lord put his 
finger on the problem in the 1860s. When gold left the country to pay 
foreign debts, the multiples of banknotes ostensibly "backed" by it 
had to be withdrawn from circulation as well. The result was money 
contraction and depression. "The currency for the time is annihi- 
lated," said Lord, "prices fall, business is suspended, debts remain 
unpaid, panic and distress ensue, men in active business fail, bank- 
ruptcy, ruin, and disgrace reign." Roosevelt was faced with this sort 
of implosion of the money supply in the Great Depression, forcing 
him to take the dollar off the gold standard to keep the economy from 
collapsing. In 1971, President Nixon had to do the same thing inter- 
nationally, when foreign creditors threatened to exhaust U.S. gold 
reserves by cashing in their paper dollars for gold. 


Chapter 21 - Goodbye Yellow Brick Road 

Between those two paradigm-changing events came John F. 
Kennedy, who evidently had his own ideas about free trade, the Third 
World, and the Wall Street debt game .... 

Kennedy's Last Stand 

In Battling Wall Street: The Kennedy Presidency, Donald Gibson 
contends that Kennedy was the last President to take a real stand 
against the entrenched Wall Street business interests. Kennedy was a 
Hamiltonian, who opposed the forces of "free trade" and felt that 
industry should be harnessed to serve the Commonwealth. He felt 
strongly that the country should maintain its independence by 
developing cheap sources of energy. The stand pitted him against the 
oil/banking cartel, which was bent on raising oil prices to prohibitive 
levels in order to entangle the world in debt. 

Kennedy has been accused of "reckless militarism" and "obsessive 
anti-communism," but Gibson says his plan for neutralizing the appeal 
of Communism was more benign: he would have replaced colonialist 
and imperialist economic policies with a development program that 
included low-interest loans, foreign aid, nation-to-nation cooperation, 
and some measure of government planning. The Wall Street bankers 
evidently had other ideas. Gibson quotes George Moore, president of 
First National City Bank (now Citibank), who said: 

With the dollar leading international currency and the United 
States the world's largest exporter and importer of goods, services 
and capital, it is only natural that U.S. banks should gird 
themselves to play the same relative role in international finance 
that the great British financial institutions played in the 
nineteenth century. 

The great British financial institutions played the role of subjugating 
underdeveloped countries to the position of backward exporters of 
raw materials. It was the sort of exploitation Kennedy's foreign policy 
aimed to eliminate. He crossed the banking community and the 
International Monetary Fund when he continued to give foreign aid 
to Latin American countries that had failed to adopt the bankers' 
policies. Gibson writes: 

Kennedy's support for economic development and Third World 
nationalism and his tolerance for government economic planning, 
even when it involved expropriation of property owned by 
interests in the U.S., all led to conflicts between Kennedy and 
elites within both the U.S. and foreign nations. 1 

Web of Debt 

There is also evidence that Kennedy crossed the bankers by seeking 
to revive a silver-backed currency that would be independent of the 
banks and their privately-owned Federal Reserve. The matter remains 
in doubt, since his Presidency came to an untimely end before he could 
play his hand; 2 but he did authorize the Secretary of the Treasury to 
issue U.S. Treasury silver certificates, and he was the last President to 
issue freely-circulating United States Notes (Greenbacks). When Vice 
President Lyndon Johnson stepped into the Presidential shoes, his first 
official acts included replacing government-issued United States Notes 
with Federal Reserve Notes, and declaring that Federal Reserve Notes 
could no longer be redeemed in silver. New Federal Reserve Notes 
were released that omitted the former promise to pay in "lawful 
money." In 1968, Johnson issued a proclamation that even Federal 
Reserve Silver Certificates could not be redeemed in silver. The one 
dollar bill, which until then had been a silver certificate, was made a 
Federal Reserve note, not redeemable in any form of hard currency. 3 
United States Notes in $100 denominations were printed in 1966 to 
satisfy the 1878 Greenback Law requiring their issuance, but most 
were kept in a separate room at the Treasury and were not circulated. 
In the 1990s, the Greenback Law was revoked altogether, eliminating 
even that token issuance. 

Barbarians Inside the Gates 

Although the puppeteers behind Kennedy's assassination have 
never been officially exposed, some investigators have concluded that 
he was another victim of the invisible hand of the international 
corporate/banking/ military cartel. 4 President Eisenhower warned 
in his 1961 Farewell Address of the encroaching powers of the military- 
industrial complex. To that mix Gibson would add the oil cartel and 
the Morgan-Rockefeller banking sector, which were closely aligned. 
Kennedy took a bold stand against them all. 

How he stood up to the CIA and the military was revealed by 
James Bamford in a book called Body of Secrets, which was featured 
by ABC News in November 2001, two months after the World Trade 
Center disaster. The book discussed Kennedy's threat to abolish the 
CIA's right to conduct covert operations, after he was presented with 
secret military plans code-named "Operation Northwoods" in 1962. 
Drafted by America's top military leaders, these bizarre plans included 
proposals to kill innocent people and commit acts of terrorism in U.S. 


Chapter 21 - Goodbye Yellow Brick Road 

cities, in order to create public support for a war against Cuba. Actions 
contemplated included hijacking planes, assassinating Cuban emigres, 
sinking boats of Cuban refugees on the high seas, blowing up a U.S. 
ship, orchestrating violent terrorism in U.S. cities, and causing U.S. 
military casualties, all for the purpose of tricking the American public 
and the international community into supporting a war to oust Cuba's 
then-new Communist leader Fidel Castro. The proposal stated, "We 
could blow up a U.S. ship in Guantanamo Bay and blame Cuba," and 
that "casualty lists in U.S. newspapers would cause a helpful wave of 
national indignation." 5 

Needless to say, Kennedy was shocked and flatly vetoed the plans. 
The head of the Joint Chiefs of Staff was promptly transferred to an- 
other job. The country's youngest President was assassinated the fol- 
lowing year. Whether or not Operation Northwoods played a role, it 
was further evidence of an "invisible government" acting behind the 
scenes. His disturbing murder was a wake-up call for a whole gen- 
eration of activists. Things in the Emerald City were not as green as 
they seemed. The Witch and her minions had gotten inside the gates. 

Bretton Woods: The Rise and Fall 
of an International Gold Standard 

Lyndon Johnson was followed in the White House by Richard 
Nixon, the candidate Kennedy defeated in 1960. In 1971, President 
Nixon took the dollar off the gold standard internationally, leaving 
currencies to "float" in the market so that they had to compete with 
each other as if they were commodities. Currency markets were turned 
into giant casinos that could be manipulated by powerful hedge funds, 
multinational banks and other currency speculators. William Engdahl, 
author of A Century of War, writes: 

In this new phase, control over monetary policy was, in effect, 
privatized, with large international banks such as Citibank, 
Chase Manhattan or Barclays Bank assuming the role that central 
banks had in a gold system, but entirely without gold. "Market 
forces" now could determine the dollar. And they did with a 
vengeance. 6 

It was not the first time floating exchange rates had been tried. 
An earlier experiment had ended in disaster, when the British pound 
and the U.S. dollar had both been taken off the gold standard in the 
1930s. The result was a series of competitive devaluations that only 


Web of Debt 

served to make the global depression worse. The Bretton Woods 
Accords were entered into at the end of World War II to correct this 
problem. Foreign exchange markets were stabilized with an 
international gold standard, in which each country fixed its currency's 
global price against the price of gold. Currencies were allowed to 
fluctuate from this "peg" only within a very narrow band of plus or 
minus one percent. The International Monetary Fund (IMF) was set 
up to establish exchange rates, and the International Bank for 
Reconstruction and Development (the World Bank) was founded to 
provide credit to war-ravaged and Third World countries. 7 

The principal architects of the Bretton Woods Accords were British 
economist John Maynard Keynes and Assistant U.S. Treasury Secretary 
Harry Dexter White. Keynes envisioned an international central bank 
that had the power to create its own reserves by issuing its own 
currency, which he called the "bancor." But the United States had 
just become the world's only financial superpower and was not ready 
for that step in 1944. The IMF system was formulated mainly by White, 
and it reflected the power of the American dollar. The gold standard 
had failed earlier because Great Britain and the United States, the 
global bankers, had run out of gold. Under the White Plan, gold would 
be backed by U.S. dollars, which were considered "as good as gold" 
because the United States had agreed to maintain their convertibility 
into gold at $35 per ounce. As long as people had faith in the dollar, 
there was little fear of running out of gold, because gold would not 
actually be used. Hans Schicht notes that the Bretton Woods Accords 
were convened by the "master spider" David Rockefeller. 8 They played 
right into the hands of the global bankers, who needed the ostensible 
backing of gold to justify a massive expansion of U.S. dollar debt around 
the world. 

The Bretton Woods gold standard worked for a while, but it was 
mainly because few countries actually converted their dollars into gold. 
Trade balances were usually cleared in U.S. dollars, due to their unique 
strength after World War II. Things fell apart, however, when foreign 
investors began to doubt the solvency of the United States. By 1965, 
the Vietnam War had driven the country heavily into debt. French 
President Charles DeGaulle, seeing that the United States was spending 
far more than it had in gold reserves, cashed in 300 million of France's 
U.S. dollars for the gold supposedly backing them. The result was to 
seriously deplete U.S. gold reserves. In 1969, the IMF attempted to 
supplement this shortage by creating "Special Drawing Rights" — 
Greenback-style credits drawn on the IMF. But it was only a stopgap 
measure. In 1971, the British followed the French and tried to cash in 


Chapter 21 - Goodbye Yellow Brick Road 

their gold-backed U.S. dollars for gold, after Great Britain incurred 
the largest monthly trade deficit in its history and was turned down 
by the IMF for a $300 billion loan. The sum sought was fully one-third 
the gold reserves of the United States. The problem might have been 
alleviated in the short term by raising the price of gold, but that was 
not the agenda that prevailed. The gold price was kept at $35 per 
ounce, forcing President Nixon to renege on the gold deal and close 
the "gold window" permanently. To his credit, Nixon did not take 
this step until he was forced into it, although it had been urged by 
economist Milton Friedman in 1968. 9 

The result of taking the dollar off the gold standard was to finally 
take the brakes off the printing presses. Fiat dollars could now be 
generated and circulated to whatever extent the world would take 
them. The Witches of Wall Street proceeded to build a worldwide 
financial empire based on a "fractional reserve" banking system that 
used bank-created paper dollars in place of the time-honored gold. 
Dollars became the reserve currency for a global net of debt to an 
international banking cartel. It all worked out so well for the bankers 
that skeptical commentators suspected it had been planned that way. 
Professor Antal Fekete wrote in an article in the May 2005 Asia Times 
that the removal of the dollar from the gold standard was "the biggest 
act of bad faith in history." He charged: 

It is disingenuous to say that in 1971 the US made the dollar 
"freely floating." What the US did was nothing less than 
throwing away the yardstick measuring value. It is truly 
unbelievable that in our scientific day and age when the material 
and therapeutic well-being of billions of people depends on the 
increasing accuracy of measurement in physics and chemistry, 
dismal monetary science has been allowed to push the world 
into the Dark Ages by abolishing the possibility of accurate 
measurement of value. We no longer have a reliable yardstick 
to measure value. There was no open debate of the wisdom, or 
the lack of it, to run the economy without such a yardstick. 10 

Whether unpegging the dollar from gold was a deliberate act of 
bad faith might be debated, but the fact remains that gold was 
inadequate as a global yardstick for measuring value. The price of 
gold fluctuated widely, and it was subject to manipulation by 
speculators. Gold also failed as a global reserve currency, because 
there was not enough gold available to do the job. If one country had 
an outstanding balance of payments because it had not exported 
enough goods to match its imports, that imbalance was corrected by 


Web of Debt 

transferring reserves of gold between countries; and to come up with 
the gold, the debtor country would cash in its U.S. dollars for the 
metal, draining U.S. gold reserves. It was inevitable that the U.S. 
government (the global banker) would eventually run out of gold. 
Some proposals for pegging currency exchange rates that would retain 
the benefits of the gold standard without its shortcomings are explored 
in Chapter 46. 

The International Currency Casino 

The gold standard was flawed, but the system of "floating" 
exchange rates that replaced it was much worse, particularly for Third 
World countries. Currencies were now valued merely by their relative 
exchange rates in the "free" market. Foreign exchange markets became 
giant casinos, in which the investors were just betting on the relative 
positions of different currencies. Smaller countries were left at the 
mercy of the major players - whether other countries, multinational 
corporations or multinational banks - which could radically devalue 
national currencies just by selling them short on the international 
market in large quantities. These currency manipulations could be so 
devastating that they could be used to strong-arm concessions from 
target economies. That happened, for example, during the Asian Crisis 
of 1997-98, when they were used to "encourage" Thailand, Malaysia, 
Korea and Japan to come into conformance with World Trade 
Organization rules and regulations. 11 (More on this in Chapter 26.) 

The foreign exchange market became so unstable that crises could 
result just from rumors of economic news and changes in perception. 
Commercial risks from sudden changes in the value of foreign curren- 
cies are now considered greater even than political or market risks for 
conducting foreign trade. 12 Huge derivative markets have developed 
to provide hedges to counter these risks. The hedgers typically place 
bets both ways, in order to be covered whichever way the market 
goes. But derivatives themselves can be very risky and expensive, and 
they can further compound market instability. 

The system of floating exchange rates was the same system that 
had been tried briefly in the 1930s and had proven disastrous; but 
there seemed no viable alternative after the dollar went off the gold 
standard, so most countries agreed to it. Nations that resisted could 
usually be coerced into accepting the system as a condition of debt 
relief; and many nations needed debt relief, after the price of oil 
suddenly quadrupled in 1974. That highly suspicious rise occurred 


Chapter 21 - Goodbye Yellow Brick Road 

soon after an oil deal was engineered by U.S. interests with the royal 
family of Saudia Arabia, the largest oil producer in OPEC (the 
Organization of the Petroleum Exporting Countries). The deal was 
evidently brokered by U.S. Secretary of State Henry Kissinger. It 
involved an agreement by OPEC to sell oil only for dollars in return 
for a secret U.S. agreement to arm Saudi Arabia and keep the House 
of Saud in power. According to John Perkins in his eye-opening book 
Confessions of an Economic Hit Man, the arrangement basically 
amounted to protection money, insuring that the House of Saud would 
not go the way of Iran's Prime Minister Mossadegh, who was 
overthrown by a CIA-engineered coup in 1954. 13 

The U.S. dollar, which had formerly been backed by gold, was 
now "backed" by oil. Every country had to acquire Federal Reserve 
Notes to purchase this essential commodity. Oil-importing countries 
around the world suddenly had to export goods to get the dollars to 
pay their expensive new oil import bills, diverting their productive 
capacity away from feeding and clothing their own people. Coun- 
tries that had a "negative trade balance" because they failed to export 
more goods than they imported were advised by the World Bank and 
the IMF to unpeg their currencies from the dollar and let them "float" 
in the currency market. The theory was that an "overvalued" cur- 
rency would then become devalued naturally until it found its "true" 
level. Devaluation would make exports cheaper and imports more 
expensive, allowing the country to build up a positive trade balance 
by selling more goods than it bought. That was the theory, but as 
Michael Rowbotham observes, it has not worked well in practice: 

There is the obvious, but frequently ignored point that, whilst 
lowering the value of a currency may promote exports, it will 
also raise the cost of imports. This of course is intended to deter 
imports. But if the demand for imports is "inelastic," reflecting 
essential goods and services, contracts and preferences, then the 
net cost of imports may not fall, and may actually rise. Also, 
whilst the volume of exports may rise, appearing to promise 
greater earnings, the financial return per unit of exports will fall. . . 
Time and time again, nations devaluing their currencies have 
seen volumes of exports and imports alter slightly, but with little 
overall impact on the financial balance of trade. 14 

If the benefits of letting the currency float were minor, the 
downsides were major: the currency was now subject to rampant 
manipulation by speculators. The result was a disastrous roller coaster 


Web of Debt 

ride, particularly for Third World economies. Today, most currency 
trades are done purely for speculative profit. Currencies rise or fall 
depending on quantities traded each day. Bernard Lietaer writes in 
The Future of Money : 

Your money's value is determined by a global casino of 
unprecedented proportions: $2 trillion are traded per day in 
foreign exchange markets, 200 times more than the trading volume 
of all the stock markets of the world combined. Only 2% of these 
foreign exchange transactions relate to the "real" economy 
reflecting movements of real goods and services in the world, 
and 98% are purely speculative. This global casino is triggering 
the foreign exchange crises which shook Mexico in 1994-5, Asia 
in 1997 and Russia in 1998. 15 

The alternative to letting the currency float is for a national 
government to keep its currency tightly pegged to the U.S. dollar, but 
governments that have taken that course have faced other hazards. 
The currency becomes vulnerable to the monetary policies of the United 
States; and if the country does not set its peg right, it can still be the 
target of currency raids. In the interests of "free trade," the government 
usually agrees to keep its currency freely convertible into dollars. That 
means it has to stand ready to absorb any surpluses or fill any shortages 
in the exchange market; and to do this, it has to have enough dollars 
in reserve to buy back the local currency of anyone wanting to sell. If 
the government guesses wrong and sets the peg too high (so that its 
currency will not really buy as much as the equivalent in dollars), 
there will be "capital flight" out of the local currency into the more 
valuable dollars. (Indeed, speculators can induce capital flight even 
when the peg isn't set too high, as we'll see shortly.) Capital flight can 
force the government to spend its dollar reserves to "defend" its 
currency peg; and when the reserves are exhausted, the government 
will either have to default on its obligations or let its currency be 
devalued. When the value of the currency drops, so does everything 
valued in it. National assets can then be snatched up by circling 
"vulture capitalists" for pennies on the dollar. 

Following all this can be a bit tricky, but the bottom line is that 
there is no really safe course at present for most small Third World 
nations. Whether their currencies are left to float or are kept tightly 
pegged to the dollar, they can still be attacked by speculators. There is 
a third alternative, but few countries have been in a position to take it: 
the government can peg its currency to the dollar and not support its 


Chapter 21 - Goodbye Yellow Brick Road 

free conversion into other currencies. 16 Professor Henry C. K. Liu, the 
Chinese American economist quoted earlier, says that China escaped 
the 1998 "Asian crisis" in this way. He writes: 

China was saved from such a dilemma because the yuan was 
not freely convertible. In a fundamental way, the Chinese miracle of 
the past half a decade has been made possible by its fixed exchange 
rate and currency control .... 

But China too has been under pressure to let its currency float. 
Liu warns the country of his ancestors: 

[T]he record of the past three decades shows that neo-liberal 
ideology brought devastation to every economy it invaded .... 
China will not be exempt from such a fate when it makes the 
yuan fully convertible at floating rates. 17 

There is no real solution to this problem short of global monetary 
reform. China's money system is explored in detail in Chapter 27, 
and proposals for reforming the international system are explored in 
Chapter 46. 

Setting the Debt Trap: 
"Emerging Markets" for Petrodollar Loans 

When the price of oil quadrupled in the 1970s, OPEC countries 
were suddenly flooded with U.S. currency; and these "petrodollars" 
were usually deposited in London and New York banks. They were 
an enormous windfall for the banks, which recycled them as low- 
interest loans to Third World countries that were desperate to borrow 
dollars to finance their oil imports. Like other loans made by commercial 
banks, these loans did not actually consist of money deposited by their 
clients. The deposits merely served as "reserves" for loans created by 
the "multiplier effect" out of thin air. 18 Through the magic of fractional- 
reserve lending, dollars belonging to Arab sheiks were multiplied many 
times over as accounting-entry loans. The "emerging nations" were 
discovered as "emerging markets" for this new international financial 
capital. Hundreds of billions of dollars in loan money were generated 
in this way. 

Before 1973, Third World debt was manageable and contained. It 
was financed mainly through public agencies including the World 
Bank, which invested in projects promising solid economic success. 19 
But things changed when private commercial banks got into the game. 


Web of Debt 

The banks were not in the business of "development." They were in 
the business of loan brokering. Some called it "loan sharking." The 
banks preferred "stable" governments for clients. Generally, that meant 
governments controlled by dictators. How these dictators had come 
to power, and what they did with the money, were not of immediate 
concern to the banks. The Philippines, Chile, Brazil, Argentina, and 
Uruguay were all prime loan targets. In many cases, the dictators 
used the money for their own ends, without significantly bettering the 
condition of the people; but the people were saddled with the bill. 

The screws were tightened in 1979, when the U.S. Federal Reserve 
under Chairman Paul Volcker unilaterally hiked interest rates to 
crippling levels. Engdahl notes that this was done after foreign dollar- 
holders began dumping their dollars in protest over the foreign policies 
of the Carter administration. Within weeks, Volcker allowed U.S. 
interest rates to triple. They rose to over 20 percent, forcing global 
interest rates through the roof, triggering a global recession and mass 
unemployment. 20 By 1982, the dollar's status as global reserve currency 
had been saved, but the entire Third World was on the brink of 
bankruptcy, choking from usurious interest charges on their petrodollar 

That was when the IMF got in the game, brought in by the London 
and New York banks to enforce debt repayment and act as "debt 
policeman." Public spending for health, education and welfare in 
debtor countries was slashed, following IMF orders to ensure that the 
banks got timely debt service on their petrodollars. The banks also 
brought pressure on the U.S. government to bail them out from the 
consequences of their imprudent loans, using taxpayer money and 
U.S. assets to do it. The results were austerity measures for Third 
World countries and taxation for American workers to provide welfare 
for the banks. The banks were emboldened to keep aggressively 
lending, confident that they would again be bailed out if the debtors' 
loans went into default. 

Worse for American citizens, the United States itself ended up a 
major debtor nation. Because oil is an essential commodity for every 
country, the petrodollar system requires other countries to build up 
huge trade surpluses in order to accumulate the dollar surpluses they 
need to buy oil. These countries have to sell more goods in dollars 
than they buy, to give them a positive dollar balance. That is true for 
every country except the United States, which controls the dollar and 
issues it at will. More accurately, the Federal Reserve and the private 
commercial banking system it represents control the dollar and issue 


Chapter 21 - Goodbye Yellow Brick Road 

it at will. Since U.S. economic dominance depends on the dollar 
recycling process, the United States has acquiesced in becoming 
"importer of last resort." The result has been to saddle it with a 
growing negative trade balance or "current account deficit." By 2000, 
U.S. trade deficits and net liabilities to foreign accounts were well over 
22 percent of gross domestic product. In 2001, the U.S. stock market 
collapsed; and tax cuts and increased federal spending turned the 
federal budget surplus into massive budget deficits. In the three years 
after 2000, the net U.S. debt position almost doubled. The United 
States had to bring in $1.4 billion in foreign capital daily, just to fund 
this debt and keep the dollar recycling game going. By 2006, the figure 
was up to $2.5 billion daily. 21 The people of the United States, like 
those of the Third World, have become hopelessly mired in debt to 
support the banking system of a private international cartel. 


Chapter 22 

The Witch bade her clean the pots and kettles and sweep the floor 
and keep the fire fed with wood. Dorothy went to work meekly, with 
her mind made up to work as hard as she could; for she was glad the 
Wicked Witch had decided not to kill her. 

- The Wonderful Wizard ofOz, 
"The Search for the Wicked Witch" 

Waves of immigrants are now pouring over the Mexican 
border into the United States in search of work, precipitating 
an illegal alien crisis for Americans. Vigilante border patrols view 
these immigrants as potential terrorists, but in fact they are refugees 
from an economic war that has deprived them of their own property 
and forced them into debt bondage to a private global banking cartel. 
When Mexico was conquered in 1520, the mighty Aztec empire was 
ruled by the unsuspecting, hospitable Montezuma. The Spanish 
General Cortes, propelled by the lure of gold, conquered by warfare, 
violence and genocide. When Mexico fell again in the twentieth 
century, it was to a more covert form of aggression, one involving a 
drastic devaluation of its national currency. 

If Montezuma's curse was his copious store of gold, for Mexico in 
the twentieth century it was the country's copious store of oil. William 
Engdahl tells the story in his revealing political history A Century of 
War . He notes that the first Mexican national Constitution vested the 
government with "direct ownership of all minerals, petroleum and 
hydro-carbons" in 1917. But when British and American oil interests 
persisted in an intense behind-the-scenes battle for these oil reserves, 


Chapter 22 - The Tequila Trap 

the Mexican government finally nationalized all its foreign oil holdings. 
The move led the British and American oil majors to boycott Mexico 
for the next forty years. When new oil reserves were discovered in 
Mexico in the 1970s, President Jose Lopez Portillo undertook an 
impressive modernization and industrialization program, and Mexico 
became the most rapidly growing economy in the developing world. 
But the prospect of a strong industrial Mexico on the southern border 
of the United States was intolerable to certain powerful Anglo- 
American interests, who determined to sabotage Mexico's 
industrialization by securing rigid repayment of its foreign debt. That 
was when interest rates were tripled. Third World loans were 
particularly vulnerable to this manipulation, because they were usually 
subject to floating or variable interest rates. 1 

Why did Mexico need to go into debt to foreign lenders? It had its 
own oil in abundance. It had accepted development loans earlier, but 
it had largely paid them off. The problem for Mexico was that it was 
one of those intrepid countries that had declined to let its national 
currency float. Mexico's dollar reserves were exhausted by speculative 
raids in the 1980s, forcing it to borrow just to defend the value of the 
peso. 2 According to Henry Liu, writing in The Asia Times, Mexico's 
mistake was in keeping its currency freely convertible into dollars, 
requiring it to keep enough dollar reserves to buy back the pesos of 
anyone wanting to sell. When those reserves ran out, it had to borrow 
dollars on the international market just to maintain its currency peg. 3 

In 1982, President Portillo warned of "hidden foreign interests" 
that were trying to destabilize Mexico through panic rumors, causing 
capital flight out of the country. Speculators were cashing in their 
pesos for dollars and depleting the government's dollar reserves in 
anticipation that the peso would have to be devalued. In an attempt 
to stem the capital flight, the government cracked under the pressure 
and did devalue the peso; but while the currency immediately lost 30 
percent of its value, the devastating wave of speculation continued. 
Mexico was characterized as a "high-risk country," leading 
international lenders to decline to roll over their loans. Caught by 
peso devaluation, capital flight, and lender refusal to roll over its debt, 
the country faced economic chaos. At the General Assembly of the 
United Nations, President Portillo called on the nations of the world 
to prevent a "regression into the Dark Ages" precipitated by the 
unbearably high interest rates of the global bankers. 

In an attempt to stabilize the situation, the President took the bold 
move of taking charge of the banks. The Bank of Mexico and the 


Web of Debt 

country's private banks were taken over by the government, with 
compensation to their private owners. It was the sort of move 
calculated to set off alarm bells for the international banking cartel. A 
global movement to nationalize the banks could destroy their whole 
economic empire. They wanted the banks privatized and under their 
control. The U.S. Secretary of State was then George Shultz, a major 
player in the 1971 unpegging of the dollar from gold. He responded 
with a plan to save the Wall Street banking empire by having the IMF 
act as debt policeman. Henry Kissinger's consultancy firm was called 
in to design the program. The result, says Engdahl, was "the most 
concerted organized looting operation in modern history," carrying 
"the most onerous debt collection terms since the Versailles reparations 
process of the early 1920s," the debt repayment plan blamed for 
propelling Germany into World War II. 4 

Mexico's state-owned banks were returned to private ownership, 
but they were sold strictly to domestic Mexican purchasers. Not until 
the North American Free Trade Agreement (NAFTA) was foreign com- 
petition even partially allowed. Signed by Canada, Mexico and the 
United States, NAFTA established a "free-trade" zone in North 
America to take effect on January 1, 1994. In entering the agreement, 
Carlos Salinas, the outgoing Mexican President, broke with decades 
of Mexican policy of high tariffs to protect state-owned industry from 
competition by U.S. corporations. 

By 1994, Mexico had restored its standing with investors. It had a 
balanced budget, a growth rate of over three percent, and a stock 
market that was up fivefold. In February 1995, Jane Ingraham wrote 
in The New American that Mexico's fiscal policy was in some respects 
"superior and saner than our own wildly spendthrift Washington 
circus." Mexico received enormous amounts of foreign investment, 
after being singled out as the most promising and safest of Latin 
American markets. Investors were therefore shocked and surprised 
when newly-elected President Ernesto Zedillo suddenly announced a 
13 percent devaluation of the peso, since there seemed no valid reason 
for the move. The following day, Zedillo allowed the formerly managed 
peso to float freely against the dollar. The peso immediately plunged 
by 39 percent. 5 

What was going on? In 1994, the U.S. Congressional Budget Office 
Report on NAFTA had diagnosed the peso as "overvalued" by 20 
percent. The Mexican government was advised to unpeg the currency 
and let it float, allowing it to fall naturally to its "true" level. The 
theory was that it would fall by only 20 percent; but that is not what 


Chapter 22 - The Tequila Trap 

happened. The peso eventually dropped by 300 percent - 15 times the 
predicted fall. 6 Its collapse was blamed on the lack of "investor 
confidence" due to Mexico's negative trade balance; but as Ingraham 
observes, investor confidence was quite high immediately before the 
collapse. If a negative trade balance is what sends a currency into 
massive devaluation and hyperinflation, the U.S. dollar itself should 
have been driven there long ago. By 2001, U.S. public and private 
debt totaled ten times the debt of all Third World countries combined. 7 

Although the peso's collapse was supposedly unanticipated, over 
4 billion U.S. dollars suddenly and mysteriously left Mexico in the 20 
days before it occurred. Six months later, this money had twice the 
Mexican purchasing power it had earlier. Later commentators main- 
tained that lead investors with inside information precipitated the stam- 
pede out of the peso. 8 The suspicion was that these investors were 
the same parties who profited from the Mexican bailout that followed. 
When Mexico's banks ran out of dollars to pay off its creditors (which 
were largely U.S. banks), the U.S. government stepped in with U.S. 
tax dollars. The Mexican bailout was engineered by Robert Rubin, 
who headed the investment bank Goldman Sachs before he became 
U.S. Treasury Secretary. Goldman Sachs was then heavily invested in 
short-term dollar-denominated Mexican bonds. The bailout was ar- 
ranged the day of Rubin's appointment. The money provided by U.S. 
taxpayers did not go to Mexico but went straight into the vaults of 
Goldman Sachs, Morgan Stanley, and other big American lenders 
whose risky loans were on the line. 9 

The late Jude Wanniski was a conservative economist who was at 
one time a Wall Street Tournal editor and adviser to President Reagan. 
He cynically observed of this banker coup: 

There was a big party at Morgan Stanley after the Mexican peso 
devaluation, people from all over Wall Street came, they drank 
champagne and smoked cigars and congratulated themselves 
on how they pulled it off and they made a fortune. These people 
are pirates, international pirates. 10 

The loot was more than just the profits of gamblers who had bet 
the right way. The pirates actually got control of Mexico's banks. 
NAFTA rules had already opened the nationalized Mexican banking 
system to a number of U.S. banks, with Mexican licenses being granted 
to 18 big foreign banks and 16 brokers including Goldman Sachs. But 
these banks could bring in no more than 20 percent of the system's 
total capital, limiting their market share in loans and securities 


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holdings. 11 By 2004, this limitation had been removed. All but one of 
Mexico's major banks had been sold to foreign banks, which gained 
total access to the formerly closed Mexican banking market. 12 

The value of Mexican pesos and Mexican stocks collapsed together, 
supposedly because there was a stampede to sell and no one around 
to buy; but buyers with ample funds were sitting on the sidelines, 
waiting to pick over the devalued stock at bargain basement prices. 
The result was a direct transfer of wealth from the local economy to 
international money manipulators. The devaluation also precipitated 
a wave of privatizations (sales of public assets to private corporations), 
as the Mexican government tried to meet its spiraling debt crisis. In a 
February 1996 article called "Militant Capitalism," David Peterson 
blamed the rout on an assault on the peso by short-sellers. He wrote: 

The austerity measures that the U.S. government and the IMF 
forced on Mexicans in the aftermath of last winter's assault on 
the peso by short-sellers in the foreign exchange markets have 
been something to behold. Almost overnight, the Mexican people 
have had to endure dramatic cuts in government spending; a 
sharp hike in regressive sales taxes; at least one million layoffs (a 
conservative estimate); a spike in interest rates so pronounced 
as to render their debts unserviceable (hence El Barzon, a nation- 
wide movement of small debtors to resist property seizures and 
to seek a rescheduling of their debts); a collapse in consumer 
spending on the order of 25 percent by mid-year; and, in brief, a 
10.5 percent contraction in overall economic activity during the 
second quarter, with more of the same sure to follow. 13 

By 1995, Mexico's foreign debt was more than twice the country's 
total debt payment for the previous century and a half. Per-capita 
income had fallen by almost a third from a year earlier, and Mexican 
purchasing power had fallen by well over 50 percent. 14 Mexico was 
propelled into a crippling national depression that has lasted for over 
a decade. As in the U.S. depression of the 1930s, the actual value of 
Mexican businesses and assets did not change during this speculator- 
induced crisis. What changed was simply that currency had been 
sucked out of the economy by investors stampeding to get out of the 
Mexican stock market, leaving insufficient money in circulation to pay 
workers, buy raw materials, finance loans, and operate the country. 
It was further evidence that when short-selling is allowed, currencies 
are driven into hyperinflation not by the market mechanism of "supply 
and demand" but by the concerted action of currency speculators. 


Chapter 22 - The Tequila Trap 

The flipside of this also appears to be true: the U.S. dollar remains 
strong despite its plunging trade balance, because it has been artificially 
manipulated up by the Fed. (More on this in Chapter 33.) Market 
manipulators, not free market forces, are in control. 

International Pirates Prowling 
in a Sea of Floating Currencies 

Countries around the world have been caught in the same trap 
that captured Mexico. Henry C K Liu calls it the "Tequila Trap." He 
also calls it "a suicidal policy masked by the giddy expansion typical 
of the early phase of a Ponzi scheme." The lure in the trap is the 
promise of massive dollar investment. At first, returns are spectacular; 
but as with every Ponzi scheme, the returns eventually collapse, leaving 
the people massively in debt to foreign bankers who will become their 
new economic masters. 15 The former Soviet states, the Tiger economies 
of Southeast Asia, and the Latin American banana republics all 
succumbed to these rapacious tactics. Local ineptitude and corrupt 
politicians are blamed, when the real culprits are international banking 
speculators armed with tsunami-sized walls of "credit" created on 
computer screens. Targeted countries are advised that to attract foreign 
investment, they must make their currencies freely convertible into 
dollars at prevailing or "floating" exchange rates, and they must keep 
adequate dollars in reserve for anyone who wants to change from one 
currency to another. After the trap is set, the speculators move in. 
Speculation has been known to bring down currencies and national 
economics in a single day. Michel Chossudovsky, Professor of 
Economics at the University of Ottawa, writes: 

The media tends to identify these currency crises as being the 
product of some internal mechanism, internal political 
weaknesses or corruption. The linkages to international finance 
are downplayed. The fact of the matter is that currency speculation, 
using speculative instruments, was ultimately the means whereby 
these central bank reserves were literally confiscated by private 
speculators. 16 

While economists debate the fiscal pros and cons of "floating" 
exchange rates, from a legal standpoint they represent a blatant fraud 
on the people who depend on a stable medium of exchange. They are 
as much a fraud as a grocer's scales with a rock on it. If a farmer's 


Web of Debt 

peso was worth thirty cents yesterday and is worth only five cents 
today, his dozen eggs have suddenly shrunk to two eggs, his dozen 
apples to two apples. The very notion that a country has to "defend" 
its currency shows that there is something wrong with the system. 
Inches don't have to defend themselves against millimeters but 
peacefully co-exist with them side by side on the same yardstick. A 
sovereign government has both the right and the duty to calibrate its 
medium of exchange so that it is a stable measure of purchasing power 
for its people. How a stable international currency yardstick might be 
devised is explored in Section VI. 

The Tequila Trap and "Free Trade" 

The "Tequila Trap" is the contemporary version of what Henry 
Carey and the American nationalists warned against in the nineteenth 
century, when they spoke of the dangers of opening a country's borders 
to "free trade." Carey said sovereign nations should pay their debts in 
their own currencies, issued Greenback-style by their own govern- 
ments. Professor Liu also advocates this approach, which he calls 
"sovereign credit." Carey called it "national credit," something he 
defined as "a national system based entirely on the credit of the 
government with the people, not liable to interference from abroad." 
Carey also called it the "American system" to distinguish it from the 
"British system" of free trade. 

Abraham Lincoln was forging ahead with that revolutionary 
model when he was assassinated. Carey and his faction, realizing that 
the country was facing the very real threat that the banking interests 
that had captured England would also capture America, then moved 
to form a bulwark against this encroaching menace by planting the 
seeds of the American system abroad. In the twentieth century, the 
British system did prevail in America; but the American system was 
quietly taking root overseas .... 


Chapter 23 

The Cowardly Lion was much pleased to hear that the Wicked 
Witch had been melted by a bucket of water, and Dorothy at once 
unlocked the gate of his prison and set him free. They went in together 
to the castle, where Dorothy's first act was to call all the Winkies 
together and tell them that they were no longer slaves. There was great 
rejoicing among the yellow Winkies, for they had been made to work 
hard during many years for the Wicked Witch, who had always treated 
them with great cruelty. 

- The Wonderful Wizard ofOz, 
"The Rescue" 

According to later commentators, Frank Baum's yellow 
Winkies represented the world's exploited and oppressed. In 
the late nineteenth century, the United States was engaged in an im- 
perial war with the Philippines, which was vigorously opposed by 
William Jennings Bryan, the Populist Lion. The Chinese had also been 
exploited in the Opium Wars, and Chinese immigrants worked like 
slaves on the railroads of the American West. To Henry Carey, they 
were all victims of the "British system," a form of political economy 
based on "free trade" and the "gold standard." He wrote in The Har- 
mony of Interests in 1851: 

Two systems are before the world One looks to underworking 

[underpaying or exploiting] the Hindoo, and sinking the rest of 
the world to his level; the other to raising the standard of man 
throughout the world to our level. One looks to pauperism, 
ignorance, depopulation, and barbarism; the other to increasing 


Chapter 23 - Freeing the Yellow Winkies 

wealth, comfort, intelligence, combination of action, and 
civilization. One looks towards universal war; the other towards 
universal peace. One is the English system; the other we may be 
proud to call the American system, for it is the only one ever devised 
the tendency of which was that of elevating while equalizing the 
condition of man throughout the world. 

In The Slave Trade, Domestic and Foreign, published in 1853, Carey 

By adopting the "free trade," or British, system, we place 
ourselves side by side with the men who have ruined Ireland 
and India, and are now poisoning and enslaving the Chinese 
people. By adopting the other, we place ourselves by the side of 
those whose measures tend not only to the improvement of their 
own subjects, but to the emancipation of the slave everywhere, 
whether in the British Islands, India, Italy, or America. 

America had narrowly escaped the fate of the Irish, Indians and 
Chinese only because President Lincoln had stood up to the bankers, 
rejecting their usurious loans in favor of government-issued Green- 
backs. He had sponsored a government program in which the coun- 
try would convert its own raw materials into manufactured goods, 
funding its own internal development by generating its own money, 
avoiding interest payments and subservience to middlemen, foreign 
or domestic. When Lincoln was assassinated and the British system 
got the upper hand, Carey and the American nationalists saw the 
need to develop a network of allies against this imminent threat. They 
encouraged political factions in Russia, Japan, Germany and France 
to bring their governments in accord with Lincoln's policies, forming 
a potential alliance that could destroy the British empire's financial 
hegemony. That alliance would later be disrupted by two world wars, 
but the foundations had been laid. 1 

The hundredth anniversary of the American Revolution was 
commemorated in 1876 with a Centennial in Philadelphia organized 
by Henry Carey and his circle. It was a World Fair that celebrated 
human freedom and potential through collective efforts to develop 
science, technology, transportation and communications. The 
Careyites funded Thomas Edison's "invention factory," which 
displayed its first telegraphic inventions at the Centennial exposition. 
Later, Edison was challenged by Carey's Philadelphia group to develop 
electricity; and Edison's partner introduced electric street cars and 
subway trains. Many other countries had their own displays at the 


Web of Debt 

Philadelphia Centennial as well, including the French, who donated 
the Statue of Liberty; and millions of people attended from all over the 
world. Foreign delegates met with the Philadelphia group to discuss 
industrialization and the development of an economic system in their 
own countries along the lines envisioned by Franklin and Lincoln. 2 

Tom Paine had called debt-free government-issued money the 
cornerstone of the American Revolution. The cornerstone had been 
rejected in America; but it was being studied by innovative leaders 
abroad, and some of them wound up rejecting the privately-created 
money of foreign financiers in favor of this home-grown variety. As 
Wall Street came to dominate American politics and the American 
media, these "nationalized" banking systems would be branded un- 
American; but they were actually made in America, patterned after 
the prototypes of Franklin, Lincoln, Carey and the American 
Greenbackers. Russia and China developed national banking systems 
on the American model in the nineteenth century, well before the 
communist revolutions that overthrew their monarchies. Ironically, 
the Marxist political system they later adopted was devised in Great 
Britain and retained the class structure of the "British system," with a 
small financial elite ruling over masses of laborers. 3 The American 
system of Franklin, Hamilton and Lincoln was something quite 
different. It celebrated private enterprise and the entrepreneurial spirit, 
while providing a collective infrastructure under which competitive 
capitalism could flourish. This protective government umbrella 
furnished checks and balances that prevented exploitation by 
monopolies and marauding foreign interests, allowed science and 
technology to bloom, and provided funding for projects that "promoted 
the general welfare," improving the collective human condition by 
drawing on the credit of the nation. 

The Russian Experience 

America's alliance with Russia dated back to the 1850s, when 
Henry Carey helped turn American opinion in Russia's favor with his 
newspaper writings. Carey argued that America should back Russia 
against England in the Crimean War. Russia, in turn, sent ships to 
back Lincoln against the British-backed Confederacy. The American 
system of economics was introduced to St. Petersburg by the U.S. 
ambassador. In 1861, Tsar Alexander II abolished serfdom and 
launched an economic plan for developing agricultural science, 


Chapter 23 - Freeing the Yellow Winkies 

communications, railroads, and other infrastructure; and America 
provided scientific and technological know-how to help Russia 
industrialize. In 1862, Russia established a uniform national currency, 
a national tax levy system, and a state-owned central bank. 4 By the 
beginning of World War I, the Russian State Bank had become one of 
the most influential lending institutions in Europe. It had vast gold 
reserves, actively granted credit to aid industry and trade, and was 
the chief source of funds for Russia's war effort. 5 

A group of Russian entrepreneurs fought to copy the American 
system advanced by Carey and his faction, but they faced stiff opposi- 
tion from the landed nobility, who were backed by international bank- 
ing interests. Although the Tsar had liberated the peasants, the nobil- 
ity forced such onerous conditions on their freedom that they remained 
exploited and oppressed. The peasants had to pay huge "redemption 
fees" to their former masters, and they were given insufficient land to 
support themselves. World War I imposed further burdens. Most of 
the working men were taken to fight the war, and those who remained 
had to work grueling hours in serf -like conditions. The people were 
forced off the land into overcrowded cities, where famine broke out. 
Although the peasants did not actually initiate the Russian Revolu- 
tion, when the match was lit, they provided the tinder to set it ablaze. 

Overthrowing the Revolution 

There were actually two Russian revolutions. The first, called the 
February Revolution, was a largely bloodless transfer of power from 
the Tsar to a regime of liberals and socialists led by Alexander Kerensky, 
who intended to instigate political reform along democratic lines. The 
far bloodier October Revolution was essentially a coup, in which 
Kerensky was overthrown by Vladimir Lenin with the support of Leon 
Trotsky and some 300 supporters who came with him from New York. 
Born Lev Bronstein, Trotsky was a Bolshevik revolutionary who had 
gone to New York after being expelled from France in 1916. He and 
his band of supporters returned to Russia in 1917 with substantial 
funding from a mystery Wall Street donor, widely thought to be Jacob 
Schiff of Kuhn Loeb. Trotsky's New York recruits later adopted Rus- 
sian names and made up the bulk of the Communist Party leader- 
ship. 6 

Why was a second Russian revolution necessary? The reasons are 
no doubt complex, but in The Creature from Tekyll Island, Ed Griffin 


Web of Debt 

suggests one that is not found in standard history texts. He observes 
that Trotsky and the Bolsheviks received strong support from the high- 
est financial and political power centers in the United States, men 
who were supposedly "capitalists" and should have strongly opposed 
socialism and communism. Griffin maintains that Lenin, Trotsky and 
their supporters were not sent to Russia to overthrow the Tsar. Rather, 
"Their assignment from Wall Street was to overthrow the revolution." 
In support, he quotes Eugene Lyons, a correspondent for United Press 
who was in Russia during the Revolution. Lyons wrote: 

Lenin, Trotsky and their cohorts did not overthrow the 
monarchy. They overthrew the first democratic society in Russian 
history, set up through a truly popular revolution in March, 1917. . . . 

They represented the smallest of the Russian radical movements. 
. . . But theirs was a movement that scoffed at numbers and frankly 
mistrusted multitudes. . . . Lenin always sneered at the obsession of 
competing socialist groups with their "mass base." "Give us an 
organization of professional revolutionaries," he used to say, "and 
we will turn Russia upside down." 

. . . Within a few months after they attained power, most of the 
tsarist practices the Leninists had condemned were revived, usually 
in more ominous forms: political prisoners, convictions without trial 
and without the formality of charges, savage persecution of 
dissenting views, death penalties for more varieties of crime than 
any other modern nation. 7 

Lenin, Trotsky and their supporters kept Russia in the hands of a 
small group of elite called the Communist Party, who were largely 
foreign imports. The Party kept Russian commerce open to "free 
trade," and it kept the banking system open to private manipulation. 
In 1917, the country's banking system was nationalized as the People's 
Bank of the Russian Republic; but this system was dissolved in 1920, 
as contradicting the Communist idea of a "moneyless economy." 8 
Griffin writes: 

In 1922, the Soviets formed their first international bank. It 
was not owned and run by the state as would be dictated by Communist 
theory but was put together by a syndicate of private bankers. These 
included not only former Tsarist bankers, but representatives of 
German, Swedish, and American banks. Most of the foreign 
capital came from England, including the British government 
itself. The man appointed as Director of the Foreign Division of 


Chapter 23 - Freeing the Yellow Winkies 

the new bank was Max May, Vice President of Morgan's 
Guaranty Trust Company in New York. 

... In the years immediately following the October Revolution, 
there was a steady stream of large and lucrative (read non- 
competitive) contracts issued by the Soviets to British and 
American businesses . . . U.S., British, and German wolves soon 
found a bonanza of profit selling to the new Soviet regime. 9 

The Cold War 

If these arrangements were so lucrative for Anglo-American busi- 
ness interests, why did the United States target Soviet Russia as the 
enemy in the Cold War following World War II? The plans of the 
international bankers evidently went awry after Lenin died in 1924. 
Trotsky was in line to become the new Soviet leader; but he got sick at 
the wrong time, and Stalin grabbed the reins of power. For the 
Trotskyites and their Wall Street backers, Stalinist Communism then 
became the enemy. Trotsky was expelled from Soviet Russia in 1928 
and returned for a time to New York, meeting his death in Mexico in 
1940 at the hands of a Soviet agent. Through most of the rest of the 
twentieth century, the banking cartel fought to regain its turf in Rus- 
sia. The "Neocons" (or "New Conservatives"), the group most associ- 
ated with the Cold War, have been traced to the Trotskyites of the 
1930s. 10 

Srdja Trifkovic is a journalist who calls himself a 
"paleoconservative" (the "Old Right" as opposed to the "New Right"). 
He writes that the Neocons moved "from the paranoid left to the para- 
noid right" after emerging from the anti-Stalinist far left in the late 
1930s and early 1940s. 11 They had discovered that capitalism suited 
their aims better than socialism, but they remained consistent in those 
aims, which were to prevail over the Russian regime and dominate 
the world economically and militarily. They succeeded on the Rus- 
sian front when the Soviet economy finally collapsed in 1989. The 
Central Bank of the Russian Federation was added to the league of 
central banks operating independently of federal and local govern- 
ments in 1991. 12 

The economic destruction of Russia and its satellites followed. Jude 
Wanniski, the Reagan-era insider quoted earlier, said that "shock 
therapy" was imposed on the Soviet countries after 1989 as an 
intentional continuation of the Cold War by other means. In a February 


Web of Debt 

2005 interview shortly before he died, Wanniski acknowledged that 
he was at one time a Neocon himself; but he said that he had had to 
break with Neocon policies after the Iron Curtain came down. He 

We were all Cold Warriors, united in a very hard line against 
Communism in Moscow and in Beijing. [We] fought the Cold 
War together and we were proud at being successful in that 
Cold War without having a nuclear exchange. But when the 
Cold War ended . . . the Russians invited me to Moscow to try 
and help them turn their communist system into a market 
economy; and I was glad to do that, for free . . . but I had to 
break with my old friends because they said we didn't beat these 
guys enough, we have to smash them into the ground, we want to 
feed them bad economic advice, "shock therapy," so that they will 
fall apart. 13 

"Shock therapy" consisted of "austerity measures" imposed in 
return for financial assistance from the International Monetary Fund 
and its sister agency the World Bank. Also called "structural 
readjustment," these belt-tightening measures included eliminating 
food program subsidies, reducing wages, increasing corporate profits, 
and privatizing public industry. According to Canadian writer Wayne 
Ellwood, structural adjustment is "a code word for economic 
globalization and privatization - a formula which aims both to shrink 
the role of the state and soften the market for private investors." 14 

Mark Weisbrot, co-director of the Center for Economic and Policy 
Research, testified before Congress in 1998 that Russia's steep decline 
after 1989 was a direct result of the harsh policies of the IMF, which 
were used as tools for "subordinating the domestic economies of 
'emerging market' countries to the whims of international financial 
markets." He told Congress: 

The IMF has presided over one of the worst economic declines 
in modern history. Russian output has declined by more than 
40% since 1992 — a catastrophe worse than our own Great 
Depression. Millions of workers are denied wages owed to them, 
a total of more than $12 billion. . . . These are the results of 
"shock therapy," a program introduced by the International 
Monetary Fund in 1992. . . . First there was an immediate de- 
control of prices. . . . [I]nflation soared 520% in the first three 
months. Millions of people saw their savings and pensions 
reduced to crumbs. 15 


Chapter 23 - Freeing the Yellow Winkies 

The IMF blamed the Russian hyperinflation on deficit spending by 
the government, but Weisbrot said it wasn't true. The real culprit was 
the IMF's insistence on "tight money": 

[F]or the first four years of "shock therapy," the government 
mostly stayed within the Fund's target range. [But] as the 
economic collapse continued, tax collection became increasingly 
difficult. ... In addition, the necessary capital was not made 
available for the potentially "efficient" firms to modernize. . . . 
Foreign direct investment was supposed to play a key role in 
providing capital, but this never materialized, given the instability 
of the economy. During the first two years of "shock therapy," 
the outflow of capital exceeded inflow by two to four times. . . . 
[T]he whole idea that Russian industry had to be destroyed, so that 
they could start from scratch on the basis of foreign investment, was 
wrong from the beginning. 

Instead of providing capital to promote productivity, Weisbrot said, 
the IMF squandered $5 billion on trying to support the plunging ruble 
in a futile attempt to maintain the exchange rate at 6 rubles to the 
dollar. The result was to deliver $5 billion into the hands of speculators 
while setting off panic buying and a new round of inflation. What 
was the point of trying to maintain the convertibility of the domestic 
currency into dollars? "The IMF argues that it is essential to creating 
a climate in which foreign direct investment can be attracted," Weisbrot 
said, "but that is clearly not worth the price in Russia, where the capital 
flows that were attracted were overwhelmingly speculative. This is 
another example of the IMF's skewed priorities, which have now 
brought Russia to a state of economic and political chaos." 

Russia had succumbed to the same sort of "free trade" policy that 
allowed British financial interests to invade America in the nineteenth 
century. It had opened itself to dependence on money created by 
outsiders, money it could have created itself — indeed had been creating 
itself, before the wolf got in the door in the form of IMF "shock therapy." 

The Soviet economic scheme had failed, but it was not because of 
its banking system. Economists blamed the Marxist theory that prices 
and employment must be determined by the State rather than left to 
market forces. The result was to stifle individual initiative and eliminate 
the mechanisms for setting prices and allocating resources provided 
by the free market. This was very different from the "American system" 
prescribed by Henry Carey and the American nationalists, who 
encouraged free markets and individual initiative under a collective 


Web of Debt 

infrastructure that helped the people to rise together. The seeds of the 
American system just had not had a chance to grow properly in Russia. 
In other fields abroad, they took better root .... 


Chapter 24 

"Frightened? You are talking to a man who has laughed in the face 
of death, sneered at doom, and chuckled at catastrophe. I was petrified. 
Then suddenly the wind changed, and the balloon floated down into 
this noble city, where I was instantly proclaimed the First Wizard 
Deluxe. Times being what they were, I accepted the job, retaining my 
balloon for a quick getaway. " 

- The Wizard of Oz (MGMfilm) 

If anyone had sneered at doom, it was the Germans after 
World War I. The bold wizardry by which they pulled them- 
selves out of bankruptcy to challenge the world in a second world 
war rivaled the audacity of the Kansas balloonist who mesmerized 
Oz. The Treaty of Versailles had imposed crushing reparations pay- 
ments on Germany. The German people were expected to reimburse 
the costs of the war for all participants — costs totaling three times the 
value of all the property in the country. Speculation in the German mark 
had caused it to plummet, precipitating one of the worst runaway 
inflations in modern times. At its peak, a wheelbarrow full of 100 
billion-mark banknotes could not buy a loaf of bread. The national 
treasury was completely broke, and huge numbers of homes and farms 
had been lost to the banks and speculators. People were living in 
hovels and starving. Nothing like it had ever happened before - the 
total destruction of the national currency, wiping out people's sav- 
ings, their businesses, and the economy generally. 

What to do? The German government followed the lead of the 
American Greenbackers and issued its own fiat money. Hjalmar 
Schacht, then head of the German central bank, is quoted in a bit of 


Chapter 24 - Sneering at Doom 

wit that sums up the German version of the "Greenback" miracle. An 
American banker had commented, "Dr. Schacht, you should come to 
America. We've lots of money and that's real banking." Schacht 
replied, "You should come to Berlin. We don't have money. That's 
real banking." 1 

The German people were in such desperate straits that they 
relinquished control of the country to a dictator, and in this they 
obviously deviated from the "American system," which presupposed 
a democratically-governed Commonwealth. But autocratic authority 
did give Adolf Hitler something the American Greenbackers could 
only dream about - total control of the economy. He was able to test 
their theories, and he proved that they worked. Like for Lincoln, 
Hitler's choices were to either submit to total debt slavery or create his 
own fiat money; and like Lincoln, he chose the fiat solution. He 
implemented a plan of public works along the lines proposed by Jacob 
Coxey and the Greenbackers in the 1890s. Projects earmarked for 
funding included flood control, repair of public buildings and private 
residences, and construction of new buildings, roads, bridges, canals, 
and port facilities. The projected cost of the various programs was 
fixed at one billion units of the national currency. One billion non- 
inflationary bills of exchange, called Labor Treasury Certificates, were 
then issued against this cost. Millions of people were put to work on 
these projects, and the workers were paid with the Treasury 
Certificates. The workers then spent the certificates on goods and 
services, creating more jobs for more people. The certificates were 
also referred to as MEFO bills, or sometimes as "Feder money." They 
were not actually debt-free; they were issued as bonds, and the 
government paid interest on them. But they circulated as money and 
were renewable indefinitely, and they avoided the need to borrow 
from international lenders or to pay off international debts. 2 

Within two years, the unemployment problem had been solved 
and the country was back on its feet. It had a solid, stable currency 
and no inflation, at a time when millions of people in the United States 
and other Western countries were still out of work and living on 
welfare. Germany even managed to restore foreign trade, although it 
was denied foreign credit and was faced with an economic boycott 
abroad. It did this by using a barter system: equipment and 
commodities were exchanged directly with other countries, 
circumventing the international banks. This system of direct exchange 
occurred without debt and without trade deficits. Germany's economic 
experiment, like Lincoln's, was short-lived; but it left some lasting 


Web of Debt 

monuments to its success, including the famous Autobahn, the world's 
first extensive superhighway. 3 

According to Stephen Zarlenga in The Lost Science of Money, Hitler 
was exposed to the fiat-money solution when he was assigned by 
German Army intelligence to watch the German Workers Party after 
World War I. He attended a meeting that made a deep impression on 
him, at which the views of Gottfried Feder were propounded: 

The basis of Feder' s ideas was that the state should create and 
control its money supply through a nationalized central bank 
rather than have it created by privately owned banks, to whom 
interest would have to be paid. From this view derived the 
conclusion that finance had enslaved the population by usurping 
the nation's control of money. 4 

Zarlenga traces the idea that the state should create its own money 
to German theorists who had apparently studied the earlier Ameri- 
can Greenback movement. Where Feder and Hitler diverged from the 
American Greenbackers was in equating the financiers who had en- 
slaved the population with the ethnic race of the prominent bankers 
of the day. The result was to encourage a wave of anti-semitism that 
darkened Germany and blackened its leader's name. The nineteenth 
century Greenbackers saw more clearly what the true enemy was - 
not an ethnic group but a financial scheme, one that transferred the 
power to create money from the collective body of the people to a 
private banking elite. The terrible human rights violations Germany 
fell into could have been avoided by a stricter adherence to the "Ameri- 
can system," keeping the reins of power with the people themselves. 

While Hitler clearly deserved the opprobrium heaped on him for 
his later military and racial aggressions, he was enormously popular 
with the German people, at least for a time. Zarlenga suggests that 
this was because he temporarily rescued Germany from English 
economic theory - the theory that money must be borrowed against 
the gold reserves of a private banking cartel rather than issued outright 
by the government. Again, the reasons for war are complex; but 
Zarlenga postulates one that is not found in the history books: 

Perhaps [Germany] was expected to borrow gold internationally, 
and that would have meant external control over her domestic 
policies. Her decision to use alternatives to gold, would mean 
that the international financiers would be unable to exercise this 
control through the international gold standard, . . . and this 
may have led to controlling Germany through warfare instead. 5 


Chapter 24 - Sneering at Doom 

Dr. Henry Makow, a Canadian researcher, adds some evidence 
for this theory. He quotes from the 1938 interrogation of C. G. 
Rakovsky, one of the founders of Soviet Bolshevism and a Trotsky 
intimate, who was tried in show trials in the USSR under Stalin. 
Rakovsky maintained that Hitler had actually been funded by the 
international bankers through their agent Hjalmar Schacht in order 
to control Stalin, who had usurped power from their agent Trotsky. 
But Hitler had become an even bigger threat than Stalin when he 
took the bold step of creating his own money. Rakovsky said: 

[Hitler] took over for himself the privilege of manufacturing 
money and not only physical moneys, but also financial ones; 
he took over the untouched machinery of falsification and put it 
to work for the benefit of the state .... Are you capable of 
imagining what would have come ... if it had infected a number 
of other states and brought about the creation of a period of 
autarchy. If you can, then imagine its counterrevolutionary 
functions . . . . 6 

Autarchy is a national economic policy that aims at achieving self- 
sufficiency and eliminating the need for imports. Countries that take 
protectionist measures and try to prevent free trade are sometimes 
described as autarchical. Rakowsky's statement recalls the editorial 
attributed to the The London Times, warning that if Lincoln's 
Greenback plan were not destroyed, "that government will furnish its 
own money without cost. It will pay off debts and be without a debt. 
It will have all the money necessary to carry on its commerce. It will 
become prosperous beyond precedent in the history of the civilized 
governments of the world." Germany was well on its way to achieving 
those goals. Henry C K Liu writes of the country's remarkable 

The Nazis came to power in Germany in 1933, at a time when 
its economy was in total collapse, with ruinous war-reparation 
obligations and zero prospects for foreign investment or credit. 
Yet through an independent monetary policy of sovereign credit 
and a full-employment public-works program, the Third Reich 
was able to turn a bankrupt Germany, stripped of overseas 
colonies it could exploit, into the strongest economy in Europe 
within four years, even before armament spending began. 7 

In Billions for the Bankers, Debts for the People (1984), Sheldon 
Emry also credited Germany's startling rise from bankruptcy to a world 


Web of Debt 

power to its decision to issue its own money. He wrote: 

Germany financed its entire government and war operation from 
1935 to 1945 without gold and without debt, and it took the 
whole Capitalist and Communist world to destroy the German 
power over Europe and bring Europe back under the heel of the 
Bankers. Such history of money does not even appear in the 
textbooks of public (government) schools today. 

What does appear in modern textbooks is the disastrous runaway 
inflation suffered in 1923 by the Weimar Republic (the common name 
for the republic that governed Germany from 1919 to 1933). The 
radical devaluation of the German mark is cited as the textbook 
example of what can go wrong when governments are given the 
unfettered power to print money. That is what it is cited for; but 
again, in the complex world of economics, things are not always as 
they seem .... 

Another Look at the Weimar Hyperinflation 

The Weimar financial crisis began with the crushing reparations 
payments imposed at the Treaty of Versailles. Hjalmar Schacht, who 
was currency commissioner for the Republic, complained: 

The Treaty of Versailles is a model of ingenious measures for the 
economic destruction of Germany. . . . [T]he Reich could not 
find any way of holding its head above the water other than by 
the inflationary expedient of printing bank notes. 

That is what he said at first; but Zarlenga writes that Schacht 
proceeded in his 1967 book The Magic of Money "to let the cat out of 
the bag, writing in German, with some truly remarkable admissions 
that shatter the 'accepted wisdom' the financial community has 
promulgated on the German hyperinflation." 8 Schacht revealed that it 
was the privately-owned Reichsbank, not the German government, that 
was pumping new currency into the economy. Like the U.S. Federal 
Reserve, the Reichsbank was overseen by appointed government 
officials but was operated for private gain. The mark's dramatic 
devaluation began soon after the Reichsbank was "privatized," or 
delivered to private investors. What drove the wartime inflation into 
hyperinflation, said Schacht, was speculation by foreign investors, who would 
sell the mark short, betting on its decreasing value. Recall that in the 
short sale, speculators borrow something they don't own, sell it, then 


Chapter 24 - Sneering at Doom 

"cover" by buying it back at the lower price. Speculation in the German 
mark was made possible because the Reichsbank made massive 
amounts of currency available for borrowing, marks that were created 
on demand and lent at a profitable interest to the bank. When the 
Reichsbank could not keep up with the voracious demand for marks, 
other private banks were allowed to create them out of nothing and 
lend them at interest as well. 9 

According to Schacht, not only was the government not the cause 
of the Weimar hyperinflation, but it was the government that got the 
disaster under control. The Reichsbank was put under strict regulation, 
and prompt corrective measures were taken to eliminate foreign 
speculation by eliminating easy access to loans of bank-created money. 
Hitler then got the country back on its feet with his MEFO bills issued 
by the government. 

Schacht actually disapproved of the new government-issued money 
and wound up getting fired as head of the Reichsbank when he refused 
to issue it, something that may have saved him at the Nuremberg trials. 
But he acknowledged in his later memoirs that Feder's theories had 
worked. Allowing the government to issue the money it needed had 
not produced the price inflation predicted by classical economic theory. 
Schacht surmised that this was because factories were sitting idle and 
people were unemployed. In this he agreed with Keynes: when the 
resources were available to increase productivity, adding money to 
the economy did not increase prices; it increased goods and services. 
Supply and demand increased together, leaving prices unaffected. 

These revelations put the notorious hyperinflations of modern 
history in a different light .... 


Chapter 25 

There is no subtler, no surer means of overturning the existing 
basis of society than to debauch the currency. The process engages all 
the hidden forces of economic law on the side of destruction, and does 
it in a manner which not one man in a million is able to diagnose. 

- John Maynard Keynes, 
Economic Consequences of the Peace (1919) 

The rampant runaway inflations of Third World economies 
are widely blamed on desperate governments trying to solve 
their economic problems by running the currency printing presses, 
but closer examination generally reveals other hands to be at work. 
What causes merchants to raise their prices is not a sudden flood of 
money from customers competing for their products because the money 
supply has been pumped up with new currency. Rather, it is a dra- 
matic increase in the merchants' own costs as a result of a radical de- 
valuation of the local currency; and this devaluation can usually be 
traced to manipulations in the currency's floating exchange rate. Here 
are a few notable examples .... 

The Ruble Collapse in Post-Soviet Russia 

The usual explanation for the drastic runaway inflation that 
afflicted Russia and its former satellites following the fall of the Iron 
Curtain is that their governments resorted to printing their own money, 
diluting the money supply and driving up prices. But as William 


Chapter 25 - Another Look at the Inflation Humbug 

Engdahl shows in A Century of War, this is not what was actually 
going on. Rather, hyperinflation was a direct and immediate result of 
letting their currencies float in foreign exchange markets. He writes: 

In 1992 the IMF demanded a free float of the Russian ruble as 
part of its "market-oriented" reform. The ruble float led within a 
year to an increase in consumer prices of 9,900 per cent, and a collapse 
in real wages of 84 per cent. For the first time since 1917, at least 
during peacetime, the majority of Russians were plunged into 
existential poverty. . . . Instead of the hoped-for American-style 
prosperity, two-cars-in-every-garage capitalism, ordinary 
Russians were driven into economic misery. 1 

After the Berlin Wall came down, the IMF was put in charge of 
the market reforms that were supposed to bring the former Soviet 
countries in line with the Western capitalist economies that were domi- 
nated by the dollars of the private Federal Reserve and private U.S. 
banks. The Soviet people acquiesced, lulled by dreams of the sort of 
prosperity they had seen in the American movies. But Engdahl says it 
was all a deception: 

The aim of Washington's IMF "market reforms" in the former 
Soviet Union was brutally simple: destroy the economic ties that 
bound Moscow to each part of the Soviet Union .... IMF shock 
therapy was intended to create weak, unstable economies on the 
periphery of Russia, dependent on Western capital and on dollar 
inflows for their survival — a form of neocolonialism. . . . The Russians 
were to get the standard Third World treatment . . . IMF 
conditionalities and a plunge into poverty for the population. A 
tiny elite were allowed to become fabulously rich in dollar terms, 
and manipulable by Wall Street bankers and investors. 

It was an intentional continuation of the Cold War by other means 
— entrapping the economic enemy with loans of accounting-entry 
money. Interest rates would then be raised to unpayable levels, and 
the IMF would be put in charge of "reforms" that would open the 
economy to foreign exploitation in exchange for debt relief. Engdahl 

The West, above all the United States, clearly wanted a 
deindustrialized Russia, to permanently break up the economic 
structure of the old Soviet Union. A major area of the global 
economy, which had been largely closed to the dollar domain 
for more than seven decades, was to be brought under its control. 
. . . The new oligarchs were "dollar oligarchs." 


Web of Debt 

The Collapse of Yugoslavia and the Ukraine 

Things were even worse in Yugoslavia, which suffered what has 
been called the worst hyperinflation in history in 1993-94. Again, the 
textbook explanation is that the government was madly printing 
money. As one college economics professor put it: 

After Tito [the Yugoslavian Communist leader until 1980], the 
Communist Party pursued progressively more irrational 
economic policies. These policies and the breakup of Yugoslavia 
. . . led to heavier reliance upon printing or otherwise creating 
money to finance the operation of the government and the 
socialist economy. This created the hyperinflation. 2 

That was the conventional view, but Engdahl maintains that the 
reverse was actually true: the Yugoslav collapse occurred because the 
IMF prevented the government from obtaining the credit it needed from 
its own central bank. Without the ability to create money and issue 
credit, the government was unable to finance social programs and 
hold its provinces together as one nation. The country's real problem 
was not that its economy was too weak but that it was too strong. Its 
"mixed model" combining capitalism and socialism was so successful 
that it threatened the bankers' IMF/ shock therapy model. Engdahl 

For over 40 years, Washington had quietly supported Yugoslavia, 
and the Tito model of mixed socialism, as a buffer against the 
Soviet Union. As Moscow's empire began to fall apart, 
Washington had no more use for a buffer - especially a 
nationalist buffer which was economically successful, one that 
might convince neighboring states in eastern Europe that a middle 
way other than IMF shock therapy was possible. The Yugoslav 
model had to be dismantled, for this reason alone, in the eyes of 
top Washington strategists. The fact that Yugoslavia also lay on 
a critical path to the potential oil riches of central Asia merely 
added to the argument. 3 

Yugoslavia was another victim of the Tequila Trap - the lure of 
wealth and development if it would open its economy to foreign 
investment and foreign loans. According to a 1984 Radio Free Europe 
report, Tito had made the mistake of allowing the country the "luxury" 
of importing more goods than it exported, and of borrowing huge 
sums of money abroad to construct hundreds of factories that never 
made a profit. When the dollars were not available to pay back these 


Chapter 25 - Another Look at the Inflation Humbug 

loans, Yugoslavia had to turn to the IMF for debt relief. The jaws of 
the whale then opened, and Yugoslavia disappeared within. 

As a condition of debt relief, the IMF demanded wholesale 
privatization of the country's state enterprises. The result was to bank- 
rupt more than 1,100 companies and produce more than 20 percent 
unemployment. IMF policies caused inflation to rise dramatically, until 
by 1991 it was over 150 percent. When the government was not able 
to create the money it needed to hold its provinces together, economic 
chaos followed, causing each region to fight for its own survival. 
Engdahl states: 

Reacting to this combination of IMF shock therapy and direct 
Washington destabilization, the Yugoslav president, Serb 
nationalist Slobodan Milosevic, organized a new Communist 
Party in November 1990, dedicated to preventing the breakup 
of the federated Yugoslav Republic. The stage was set for a 
gruesome series of regional ethnic wars which would last a 
decade and result in the deaths of more than 200,000 people. 

... In 1992 Washington imposed a total economic embargo 
on Yugoslavia, freezing all trade and plunging the economy into 
chaos, with hyperinflation and 70 percent unemployment as 
the result. The Western public, above all in the United States, 
was told by establishment media that the problems were all the 
result of a corrupt Belgrade dictatorship. 

Similar interventions precipitated runaway inflation in the 
Ukraine, where the IMF "reforms" began with an order to end state 
foreign exchange controls in 1994. The result was an immediate 
collapse of the currency. The price of bread shot up 300 percent; 
electricity shot up 600 percent; public transportation shot up 900 
percent. State industries that were unable to get bank credit were 
forced into bankruptcy. As a result, says Engdahl: 

Foreign speculators were free to pick the jewels among the rubble 
at dirt-cheap prices. . . . The result was that Ukraine, once the 
breadbasket of Europe, was forced to beg food aid from the U.S., 
which dumped its grain surpluses on Ukraine, further destroying 
local food self-sufficiency. Russia and the states of the former 
Soviet Union were being treated like the Congo or Nigeria, as 
sources of cheap raw materials, perhaps the largest sources in 
the world. . . . [T]hose mineral riches were now within the reach 
of Western multinationals for the first time since 1917. 4 


Web of Debt 

The Case of Argentina 

Meanwhile, the same debt monster that swallowed the former So- 
viet economies was busy devouring assets in Latin America. In Ar- 
gentina in the late 1980s, inflation shot up by as much as 5,000 per- 
cent. Again, this massive hyperinflation has been widely blamed on 
the government madly printing money; and again, the facts turn out 
to be quite different .... 

Argentina had been troubled by inflation ever since 1947, when 
Juan Peron came to power. Peron was a populist who implemented 
many new programs for workers and the poor, but he did it with 
heavy deficit spending and taxation rather than by issuing money 
Greenback-style. 5 What happened to the Argentine economy after 
Peron is detailed in a 2006 Tufts University article by Carlos Escude, 
Director of the Center for International Studies at Universidad del 
CEMA in Buenos Aires. He writes that inflation did not become a 
national crisis until the eight-year period following Peron's death in 
1974. Then the inflation rate increased seven-fold, to an "astonish- 
ing" 206 percent. But this jump, says Professor Escude, was not caused 
by a sudden printing of pesos. Rather, it was the result of an inten- 
tional, radical devaluation of the currency by the new government, 
along with a 175 percent increase in the price of oil. 

The devaluation was effected by dropping the peso's dollar peg to 
a fraction of its previous value; and this was done, according to insid- 
ers, with the intent of creating economic chaos. One source revealed, 
"The idea was to generate an inflationary stampede to depreciate the debts 
of private firms, shatter the price controls in force since 1973, and espe- 
cially benefit exporters through devaluation." Economic chaos was wel- 
comed by pro-market capitalists, who pointed to it as proof that the 
interventionist policies of the former government had been counter- 
productive and that the economy should be left to the free market. 
Economic chaos was also welcomed by speculators, who found that 
"[profiteering was a much safer way of making money than attempt- 
ing to invest, increase productivity, and compete in an economy char- 
acterized by financial instability, distorted incentives, and obstacles to 
efficient investment." 

From that time onward, writes Professor Escude, "astronomically 
high inflation led to the proliferation of speculative financial schemes 
that became a hallmark of Argentine financial life." One suicidal policy 
adopted by the government was to provide "exchange insurance" to 


Chapter 25 - Another Look at the Inflation Humbug 

private firms seeking foreign financing. The risk of exchange rate 
fluctuations was thus transferred from private businesses to the 
government, encouraging speculative schemes that forced further 
currency devaluation. Another disastrous government policy held 
that it was unfair for private firms contracting with the State to suffer 
losses from financial instability or other unforeseen difficulties while 
fulfilling their contracts. Again the risks got transferred to the State, 
encouraging predatory contractors to defraud and exploit the 
government. The private contractors' lobby became so powerful that 
the government wound up agreeing to "nationalize" (or assume 
responsibility for) private external debts. The result was to transfer 
the debts of powerful private business firms to the taxpayers. When 
interest rates shot up in the 1980s, the government dealt with these 
debts by "liquidification," evidently meaning that private liabilities 
were reduced by depreciating the currency. Again, however, this 
hyperinflation was not the result of the government printing money 
for its operational needs. Rather, it was caused by an intentional 
devaluation of the currency to reduce the debts of private profiteers in 
control of the government. 6 

Making matters worse, Argentina was one of those countries tar- 
geted by international lenders for massive petrodollar loans. When 
the rocketing interest rates of the 1980s made the loans impossible to 
pay back, concessions were required of the country that put it at the 
mercy of the IMF. Under a new government in the 1990s, Argentina 
dutifully tightened its belt and tried to follow the IMF's dictates. To 
curb the crippling currency devaluations, a "currency board" was 
imposed in 1991 that maintained a strict one-to-one peg between the 
Argentine peso and the U.S. dollar. The Argentine government and 
its central bank were prohibited by law from printing their own pesos, 
unless the pesos were fully backed by dollars held as foreign reserves. 7 
The maneuver worked to prevent currency devaluations, but the coun- 
try lost the flexibility it needed to compete in international markets. 
The money supply was fixed, limited and inflexible. The disastrous 
result was national bankruptcy, in 1995 and again in 2001. 

In the face of dire predictions that the economy would collapse 
without foreign credit, Argentina then defied its creditors and simply 
walked away from its debts. By the fall of 2004, three years after a 
record default on a debt of more than $100 billion, the country was 
well on the road to recovery; and it had achieved this feat without 
foreign help. The economy grew by 8 percent for 2 consecutive years. 
Exports increased, the currency was stable, investors were returning, 


Web of Debt 

and unemployment had eased. "This is a remarkable historical event, 
one that challenges 25 years of failed policies," said Mark Weisbrot in 
an interview quoted in The New York Times . "While other countries 
are just limping along, Argentina is experiencing very healthy growth 
with no sign that it is unsustainable, and they've done it without hav- 
ing to make any concessions to get foreign capital inflows." 8 

In January 2006, Argentina's President Nestor Kirchner paid off 
the country's entire debt to the IMF, totaling 9.81 billion U.S. dollars. 
Where did he get the dollars? The Argentine central bank had been 
routinely issuing pesos to buy dollars, in order to keep the dollar price 
of the peso from dropping. The Argentine central bank had accumu- 
lated over 27 billion U.S. dollars in this way before 2006. Kirchner 
negotiated with the bank to get a third of these dollar reserves, which 
were then used to pay the IMF debt. 9 

That the bank had been "issuing" pesos evidently meant that it 
was creating money out of nothing; but the result was reportedly not 
inflationary, at least at first. According to a December 2006 article in 
The Economist, the newly-issued pesos just stimulated the economy, 
providing the liquidity that was sorely needed by Argentina's money- 
starved businesses. By 2004, however, spare production had been 
used up and inflation had again become a problem. President Kirchner 
then stepped in to control inflation by imposing price controls and 
export bans. Critics said that these measures would halt investment, 
but according to The Economist : 

So far they have been wrong. Argentina does lack foreign 
investment. But its own smaller companies have moved quickly 
to expand capacity in response to demand. . . . Overall, 
investment has almost doubled as a percentage of GDP since 
2002, from 11% to 21.4%, enough to sustain growth of 4% a 
year. 10 

When President Kirchner paid off the IMF debt in 2006, he had 
hoped to get the central bank's dollar reserves debt-free; but he was 
foiled by certain "international funds." One disgruntled Argentine 
commentator wrote: 

Kirchner tried until the last moment to get hold of the [central 
bank's] funds as if they were surplus, without contracting any 
debt, but the international funds warned him that if he did so he 
would provoke strong speculation against the Argentine peso. 
Kirchner folded like a hand of poker and indebted the State at a 
higher rate. 11 


Chapter 25 - Another Look at the Inflation Humbug 

The "international funds" that threatened a speculative attack on 
the currency were the so-called "vulture funds" that had previously 
bought Argentina's public debt, in some cases for as little as 20 percent 
of its nominal value. Vulture funds are international financial 
organizations that specialize in buying securities in distressed 
conditions, then circle like vultures waiting to pick over the remains of 
the rapidly weakening debtor. To avoid a speculative attack on its 
currency from these funds, the Argentine government was forced to 
issue public debt of $11 billion, in order to absorb the pesos issued to 
buy the dollars to pay a debt to the IMF of under $10 billion. But to 
Kirchner, it was evidently worth the price to get out from under the 
thumb of the IMF, which he said had been "a source of demands and 
more demands," forcing "policies which provoked poverty and pain 
among Argentine people." 12 

The Case of Zimbabwe 

The same foreign banking spider that has been busily spinning its 
debt web in the former Soviet Union and Latin America has also been 
at work in Africa. A case recently in the news was that of Zimbabwe, 
which in August 2006 was reported to be suffering from a crushing 
hyperinflation of around 1,000 percent a year. As usual, the crisis 
was blamed on the government frantically issuing money; and in this 
case, the government's printing presses were indeed running. But the 
currency's radical devaluation was still the fault of speculators, and it 
might have been avoided if the government had used its printing presses 
in a more prudent way. 

The crisis dates back to 2001, when Zimbabwe defaulted on its 
loans and the IMF refused to make the usual accommodations, 
including refinancing and loan forgiveness. Apparently, the IMF 
intended to punish the country for political policies of which it 
disapproved, including land reform measures that involved reclaiming 
the lands of wealthy landowners. Zimbabwe's credit was ruined and 
it could not get loans elsewhere, so the government resorted to issuing 
its own national currency and using the money to buy U.S. dollars on 
the foreign-exchange market. These dollars were then used to pay the 
IMF and regain the country's credit rating. 13 Unlike in Argentina, 
however, the government had to show its hand before the dollars were 
in it, leaving the currency vulnerable to speculative manipulation. 
According to a statement by the Zimbabwe central bank, the 


Web of Debt 

hyperinflation was caused by speculators who charged exorbitant rates 
for U.S. dollars, causing a drastic devaluation of the Zimbabwe 

The government's real mistake, however, may have been in playing 
the IMF's game at all. Rather than using its national currency to buy 
foreign fiat money to pay foreign lenders, it could have followed the 
lead of Abraham Lincoln and the Guernsey islanders and issued its 
own currency to pay for the production of goods and services for its 
own people. Inflation would have been avoided, because the newly- 
created "supply" (goods and services) would have kept up with 
"demand" (the supply of money); and the currency would have served 
the local economy rather than being siphoned off by speculators. But 
while that solution worked in Guernsey, Guernsey is an obscure island 
without the gold and other marketable resources that make Zimbabwe 
choice spider-bait. Once a country has been caught in the foreign 
debt trap, escape is no easy matter. Even the mighty Argentina, which 
at one time was the world's seventh-richest country, was unable to 
stand up to the IMF and the "vulture funds" for long. 

All of these countries have been victims of the Tequila Trap - 
succumbing to the enticement of foreign loans and investment, opening 
their currencies to speculative manipulation. Henry C K Liu writes 
that the seduction of foreign capital was a "financial narcotic that 
would make the Opium War of 1840 look like a minor scrimmage." 14 
In the 1990s, a number of Southeast Asian economies would find this 
out to their peril .... 


Chapter 26 

Now it is well known that when there are many of these flowers 
together, their odor is so powerful that anyone who breathes it falls 
asleep. And if the sleeper is not carried away from the scent of the 
flowers, he sleeps on and on forever. 

- The Wonderful Wizard ofOz, 
"The Deadly Poppy Field" 

The deadly poppy fields that captured Dorothy and the Lion 
were an allusion to the nineteenth century Opium Wars, which 
allowed the British to impose economic imperialism on China. The 
Chinese government, alarmed at the growing number of addicts in 
the country, made opium illegal and tried to keep the British East India 
Company from selling it in the country. Britain then forced the issue 
militarily, acquiring Hong Kong in the process. 

To the Japanese, it was an early lesson in the hazards of "free 
trade." To avoid suffering the same fate themselves, they tightly sealed 
their own borders. When they opened their borders later, it was to 
the United States rather than to Britain. The Japanese Meiji Revolution 
of 1868 was guided by Japanese students of Henry Carey and the 
American nationalists. It has been called an "American System 
Renaissance," and Yukichi Fukuzawa, its intellectual leader, has been 
called "the Benjamin Franklin of Japan." The feudal Japanese warlords 
were overthrown and a modern central government was formed. The 
new government abolished the ownership of Japan's land by the feudal 
samurai nobles and returned it to the nation, paying the nobles a sum 
of money in return. 1 

How was this massive buyout financed? President Ulysses S. Grant 
warned against foreign borrowing when he visited Japan in 1879. He 


Chapter 26 - Poppy Fields, Opium Wars, and Asian Tigers 

said, "Some nations like to lend money to poor nations very much. By 
this means they flaunt their authority, and cajole the poor nation. 
The purpose of lending money is to get political power for themselves." 
Great Britain had a policy of owning the central banks of the nations 
it occupied, such as the Hongkong and Shanghai Bank in China. To 
avoid that trap, Japan became the first nation in Asia to found its own 
independent state bank. The bank issued new fiat money which was 
used to pay the samurai nobles. The nobles were then encouraged to 
deposit their money in the state bank and to put it to work creating 
new industries. Additional money was created by the government to 
aid the new industries. No expense was spared in the process of in- 
dustrialization. Money was issued in amounts that far exceeded an- 
nual tax receipts. The funds were, after all, just government credits - 
money that was internally generated, based on the credit of the gov- 
ernment rather than on debt to foreign lenders. 2 

The Japanese economic model that evolved in the twentieth century 
has been called a "state-guided market system." The state determines 
the priorities and commissions the work, then hires private enterprise 
to carry it out. The model overcame the defects of the communist 
system, which put ownership and control in the hands of the state. 
Chalmers Johnson, president of the Japan Policy Research Institute, 
wrote in 1989 that the closest thing to the Japanese model in the United 
States is the military/ industrial complex. The government determines 
the programs and hires private companies to implement them. The 
U.S. military/industrial complex is a form of state-sponsored 
capitalism that has produced one of the most lucrative and successful 
industries in the country. 3 The Japanese model differs, however, in 
that it achieved this result without the pretext of war. The Japanese 
managed to transform their warrior class into the country's 
industrialists, successfully shifting their focus to the peaceful business 
of building the country and developing industry. The old feudal 
Japanese dynasties became the multinational Japanese corporations 
we know today - Mitsubishi, Mitsui, Sumitomo, and so forth. 

The Assault of the Wall Street Speculators 

The Japanese state-guided market system was so effective and 
efficient that by the end of the 1980s, Japan was regarded as the leading 
economic and banking power in the world. Its Ministry of International 
Trade and Industry (MITI) played a heavy role in guiding national 


Web of Debt 

economic development. The model also proved highly successful in 
the "Tiger" economies — South Korea, Malaysia and other East Asian 
countries. East Asia was built up in the 1970s and 1980s by Japanese 
state development aid, along with largely private investment and MITI 
support. When the Soviet Union collapsed, Japan proposed its model 
for the former communist economies, and many began looking to Japan 
and South Korea as viable alternatives to the U.S. free-market system. 
State-guided capitalism provided for the general welfare without 
destroying capitalist incentive. Engdahl writes: 

The Tiger economies were a major embarrassment to the IMF 
free-market model. Their very success in blending private 
enterprise with a strong state economic role was a threat to the 
IMF free-market agenda. So long as the Tigers appeared to 
succeed with a model based on a strong state role, the former 
communist states and others could argue against taking the 
extreme IMF course. In east Asia during the 1980s, economic 
growth rates of 7-8 per cent per year, rising social security, 
universal education and a high worker productivity were all 
backed by state guidance and planning, albeit in a market 
economy - an Asian form of benevolent paternalism. 4 

High economic growth, rising social security, and universal 
education in a market economy - it was the sort of "Common Wealth" 
America's Founding Fathers had endorsed. But the model represented 
a major threat to the international bankers' system of debt-based money 
and IMF loans. To diffuse the threat, the Bank of Japan was pressured 
by Washington to take measures that would increase the yen's value 
against the dollar. The stated rationale was that this revaluation was 
necessary to reduce Japan's huge capital surplus (excess of exports 
over imports). The Japanese Ministry of Finance countered that the 
surplus, far from being a problem, was urgently required by a world 
needing hundreds of billions of dollars in railroad and other economic 
infrastructure after the Cold War. But the Washington contingent 
prevailed, and Japan went along with the program. By 1987, the 
Bank of Japan had cut interest rates to a low of 2.5 per cent. The 
result was a flood of "cheap" money that was turned into quick gains 
on the rising Tokyo stock market, producing an enormous stock market 
bubble. When the Japanese government cautiously tried to deflate the 
bubble by raising interest rates, the Wall Street bankers went on the 
attack, using their new "derivative" tools to sell the market short and 
bring it crashing down. Engdahl writes: 


Chapter 26 - Poppy Fields, Opium Wars, and Asian Tigers 

No sooner did Tokyo act to cool down the speculative fever, 
than the major Wall Street investment banks, led by Morgan 
Stanley and Salomon Bros., began using exotic new derivatives 
and financial instruments. Their intervention turned the orderly 
decline of the Tokyo market into a near panic sell-off, as the Wall 
Street bankers made a killing on shorting Tokyo stocks in the process. 
Within months, Japanese stocks had lost nearly $5 trillion in 
paper value. 5 

Japan, the "lead goose," had been seriously wounded. Washington 
officials proclaimed the end of the "Japanese model" and turned their 
attention to the flock of Tiger economies flying in formation behind. 

Taking Down the Tiger Economies: 
The Asian Crisis of 1997 

Until then, the East Asian countries had remained largely debt- 
free, avoiding reliance on IMF loans or foreign capital except for direct 
investment in manufacturing plants, usually as part of a long-term 
national goal. But that was before Washington began demanding 
that the Tiger economies open their controlled financial markets to 
free capital flows, supposedly in the interest of "level playing fields." 
Like Japan, the East Asian countries went along with the program. 
The institutional speculators then went on the attack, armed with a 
secret credit line from a group of international banks including 

They first targeted Thailand, gambling that it would be forced to 
devalue its currency and break from its peg to the dollar. Thailand 
capitulated, its currency was floated, and it was forced to turn to the 
IMF for help. The other geese then followed one by one. Chalmers 
Johnson wrote in The Los Angeles Times in June 1999: 

The funds easily raped Thailand, Indonesia and South Korea, 
then turned the shivering survivors over to the IMF, not to help 
victims, but to insure that no Western bank was stuck with non- 
performing loans in the devastated countries. 6 

Mark Weisbrot testified before Congress, "In this case the IMF not 
only precipitated the financial crisis, it also prescribed policies that 
sent the regional economy into a tailspin." The IMF had prescribed 
the removal of capital controls, opening Asian markets to speculation 
by foreign investors, when what these countries really needed was a 


Web of Debt 

supply of foreign exchange reserves to defend themselves against specu- 
lative currency raids. At a meeting of regional finance ministers in 
1997, the government of Japan proposed an Asian Monetary Fund 
(AMF) that would provide the needed liquidity with fewer conditions 
than were imposed by the IMF. But the AMF, which would have 
directly competed with the IMF of the Western bankers, met with 
strenuous objection from the U.S. Treasury and failed to materialize. 
Meanwhile, the IMF failed to provide the necessary reserves, while 
insisting on very high interest rates and "fiscal austerity." The result 
was a liquidity crisis (a lack of available money) that became a major 
regional depression. Weisbrot testified: 

The human cost of this depression has been staggering. Years of 
economic and social progress are being negated, as the 
unemployed vie for jobs in sweatshops that they would have 
previously rejected, and the rural poor subsist on leaves, bark, 
and insects. In Indonesia, the majority of families now have a 
monthly income less than the amount that they would need to 
buy a subsistence quantity of rice, and nearly 100 million people 
- half the population - are being pushed below the poverty line. 7 

In 1997, more than 100 billion dollars of Asia's hard currency re- 
serves were transferred in a matter of months into private financial 
hands. In the wake of the currency devaluations, real earnings and 
employment plummeted virtually overnight. The result was mass 
poverty in countries that had previously been experiencing real eco- 
nomic and social progress. Indonesia was ordered by the IMF to un- 
peg its currency from the dollar barely three months before the dra- 
matic plunge of the rupiah, its national currency. In an article in Mon- 
etary Reform in the winter of 1998-99, Professor Michel Chossudovsky 

This manipulation of market forces by powerful actors constitutes 
a form of financial and economic warfare. No need to re-colonize 
lost territory or send in invading armies. In the late twentieth 
century, the outright "conquest of nations," meaning the control 
over productive assets, labor, natural resources and institutions, 
can be carried out in an impersonal fashion from the corporate 
boardroom: commands are dispatched from a computer terminal, 
or a cell phone. Relevant data are instantly relayed to major 
financial markets - often resulting in immediate disruptions in 
the functioning of national economies. "Financial warfare" also 


Chapter 26 - Poppy Fields, Opium Wars, and Asian Tigers 

applies complex speculative instruments including the gamut of 
derivative trade, forward foreign exchange transactions, currency 
options, hedge funds, index funds, etc. Speculative instruments 
have been used with the ultimate purpose of capturing financial wealth 
and acquiring control over productive assets. 

Professor Chossudovsky quoted American billionaire Steve Forbes, 
who asked rhetorically: 

Did the IMF help precipitate the crisis? This agency advocates 
openness and transparency for national economies, yet it rivals 
the CIA in cloaking its own operations. Did it, for instance, 
have secret conversations with Thailand, advocating the 
devaluation that instantly set off the catastrophic chain of events? 
. . . Did IMF prescriptions exacerbate the illness? These countries' 
monies were knocked down to absurdly low levels. 8 

Chossudovsky warned that the Asian crisis marked the elimination 
of national economic sovereignty and the dismantling of the Bretton 
Woods institutions safeguarding the stability of national economies. 
Nations no longer have the ability to control the creation of their own 
money, which has been usurped by marauding foreign banks. 9 

Malaysia Fights Back 

Most of the Asian geese succumbed to these tactics, but Malaysia 
stood its ground. Malaysian Prime Minister Mahathir Mohamad said 
the IMF was using the financial crisis to enable giant international 
corporations to take over Third World economies. He contended: 

They see our troubles as a means to get us to accept certain 
regimes, to open our market to foreign companies to do business 
without any conditions. [The IMF] says it will give you money if 
you open up your economy, but doing so will cause all our banks, 
companies and industries to belong to foreigners. . . . 

They call for reform but this may result in millions thrown 
out of work. I told the top official of IMF that if companies were 
to close, workers will be retrenched, but he said this didn't matter 
as bad companies must be closed. I told him the companies 
became bad because of external factors, so you can't bankrupt 
them as it was not their fault. But the IMF wants the companies 
to go bankrupt. 10 


Web of Debt 

Mahathir insisted that his government had not failed. Rather, it 
had been victimized along with the rest of the region by the interna- 
tional system. He blamed the collapse of Asia's currencies on an or- 
chestrated attack by giant international hedge funds. Because they 
profited from relatively small differences in asset values, the specula- 
tors were prepared to create sudden, massive and uncontrollable out- 
flows of capital that would wreck national economies by causing capi- 
tal flight. He charged, "This deliberate devaluation of the currency of 
a country by currency traders purely for profit is a serious denial of 
the rights of independent nations." Mahathir said he had appealed to 
the international agencies to regulate currency trading to no avail, so 
he had been forced to take matters into his own hands. He had im- 
posed capital and exchange controls, a policy aimed at shifting the 
focus from catering to foreign capital to encouraging national devel- 
opment. He fixed the exchange rate of the ringgit (the Malaysian na- 
tional currency) and ordered that it be traded only in Malaysia. These 
measures did not affect genuine investors, he said, who could bring in 
foreign funds, convert them into ringgit for local investment, and ap- 
ply to the Central Bank to convert their ringgit back into foreign cur- 
rency as needed. 

Western economists waited for the economic disaster they assumed 
would follow; but capital controls actually helped to stabilize the 
system. Before controls were imposed, Malaysia's economy had 
contracted by 7.5 percent. The year afterwards, growth projections 
went as high as 5 percent. Joseph Stiglitz, chief economist for the 
World Bank, acknowledged in 1999 that the Bank had been "humbled" 
by Malaysia's performance. It was a tacit admission that the World 
Bank's position had been wrong. 11 

David had stood up to Goliath, but the real threat to the 
international bankers was Malaysia's much more powerful neighbor 
to the north. The Chinese Dragon was not only still standing; it was 
breathing fire .... 


Chapter 27 

The flowers had been too strong for the huge beast and he had given 
up at last, falling only a short distance from the end of the poppy bed 
. . . . "We can do nothing for him," said the Tin Woodman sadly. "He 
is much too heavy to lift. We must leave him here to sleep . . . ." 

- The Wonderful Wizard ofOz, 
"The Deadly Poppy Field" 

Napoleon called China a sleeping giant. "Let him sleep," 
Napoleon said. "If he wakes, he will shake the world." 
China has now awakened and is indeed shaking the world. The 
Dragon has become so strong economically that it has been called the 
greatest threat to national security the United States faces, accounting 
for the greatest imbalance of any country in the U.S. trade budget 
deficit ($150 billion of $500 billion by 2004). 1 

This balance-of-trade problem is not new. The British were al- 
ready complaining of it in the early nineteenth century. Then they 
discovered that exporting opium from India to China could offset their 
negative trade balance and give them control of China's financial sys- 
tem at the same time. The Chinese Emperor responded by banning 
the opium trade, after China started losing huge amounts of money to 
England. England then declared war, initiating the Opium War of 
1840. The Chinese people wound up with two sets of imperial rulers, 
the British as well as their own. 2 

The leader of the revolution that finally overthrew 2,000 years of 
Chinese imperial rule was Dr. Sun Yat-sen, now revered as the father 
of modern China by Nationalists and Communists alike. Like the 


Chapter 27 - Waking the Sleeping Giant 

leaders of the Japanese Meiji revolution of the 1860s, he was a protege 
of a group of American nationalists of the Lincoln/ Carey faction. Sun's 
fundamental principles, known as the "Three Principles of the People," 
were based on the concept presented by Lincoln in the Gettysburg 
Address: "government of the people, by the people, and for the people." 
Sun was educated in Hawaii, where he built up his revolutionary 
organization at the house of Frank Damon, the son of Reverand Samuel 
Damon, who had run the Hawaii delegation to the American 
Centennial in Philadelphia in 1876. Frank Damon provided money, 
support and military training to Sun's organization; and Hawaii 
became its base for making a revolutionary movement in China. 3 

The Chinese Republic was proclaimed just before World War I. 
After Sun's death, the Nationalists lost control of mainland China to 
the Chinese Communists, who founded the People's Republic of China 
in 1949; but the Communists retained much of the "American sys- 
tem" in creating their monetary scheme, which was a Chinese varia- 
tion of Lincoln's Greenback program. Before that, banknotes had been 
issued by a variety of private banks. After 1949, these banknotes were 
recalled and the renminbi (or "people's currency") became the sole 
legal currency, issued by the People's Bank of China, a wholly govern- 
ment-owned bank. The United States and other Western countries 
imposed an embargo against China in the 1950s, blocking trade be- 
tween it and most of the rest of the world except the Soviet bloc. China 
then adopted a Soviet-style centrally-planned economy; but after 1978, 
it pursued an open-door policy and was transformed from a centrally- 
planned economy back into a market economy. 4 Private industry is 
now flourishing in China, and privatization has been creeping into its 
banking system as well; but it still has government-owned banks that 
can issue national credit for domestic development. 5 

By 2004, China was leading the world in economic productivity, 
growing at 9 percent annually. In the first quarter of 2007, its economic 
growth was up to a remarkable 11.1 percent, with retail sales climbing 
15.3 percent. The commonly-held explanation for this impressive 
growth is that the Chinese are willing to work for what amounts to 
slave wages; but the starving poor of Africa, Indonesia, and Latin 
America are equally willing, yet their economies are languishing. 
Something else distinguishes China, and one key difference is its 
banking system. China has a government-issued currency and a 
system of national banks that are actually owned by the nation. 6 
According to Wikipedia, the People's Bank of China is "unusual in 


Web of Debt 

acting as a national bank, focused on the country not on the currency." 
The notion of "national banking," as opposed to private "central 
banking," goes back to Lincoln, Carey and the American nationalists. 
Henry C K Liu distinguishes the two systems like this: a national bank 
serves the interests of the nation and its people. A central bank serves 
the interests of private international finance. He writes: 

A national bank does not seek independence from the 
government. The independence of central banks is a euphemism 
for a shift from institutional loyalty to national economic well- 
being toward institutional loyalty to the smooth functioning of 
a global financial architecture . . . [Today that means] the sacrifice 
of local economies in a financial food chain that feeds the issuer 
of US dollars. It is the monetary aspect of the predatory effects 
of globalization. 

Historically, the term "central bank" has been interchange- 
able with the term "national bank." . . . However, with the 
globalization of financial markets in recent decades, a central 
bank has become fundamentally different from a national bank. 

The mandate of a national bank is to finance the sustainable 
development of the national economy .... [T]he mandate of a modern- 
day central bank is to safeguard the value of a nation's currency in a 
globalized financial market . . . through economic recession and 
negative growth if necessary. . . . [T]he best monetary policy in the 
context of central banking is . . . set by universal rules of price 
stability, unaffected by the economic needs or political 
considerations of individual nations. 7 

In 1995, a Central Bank Law was passed in China granting cen- 
tral bank status to the People's Bank of China (PBoC), shifting the 
PBoC away from its previous role as a national bank. But Liu says the 
shift was in name more than in form: 

It is safe to say that the PBoC still follows the policy directives of 
the Chinese government .... Unlike the Fed which has an arms- 
length relationship with the US Treasury, the PBoC manages 
the State treasury as its fiscal agent. . . . Recent Chinese policy 
has shifted back in populist directions to provide affirmative 
financial assistance to the poor and the undeveloped rural and 
interior regions and to reverse blatant income disparity and 
economic and regional imbalances. It can be anticipated that 
this policy shift will raise questions in the capitalist West of the 
political independence of the PBoC. Western neo-liberals will 


Chapter 27 - Waking the Sleeping Giant 

be predictably critical of the PBoC for directing money to where 
the country needs it most, rather than to that part of the economy 
where bank profit would be highest. 8 

Besides its "populist" banking system, China is distinguished by 
keeping itself free of the debt web of the IMF and the international 
banking cartel; and by refusing to let its currency float, a policy that 
has fended off the currency manipulations of international specula- 
tors. The value of the renminbi is kept pegged to the dollar; and un- 
like Mexico in the 1990s, China has such a huge store of dollar re- 
serves that it is impervious to the assaults of speculators. In 2005, 
China succumbed to Western pressure and raised its dollar peg slightly; 
but the renminbi continued to be pegged to its dollar counterpart, and 
the government retained control of its value. 

As in Hitler's Germany, the repression of human rights in China 
deserves serious censure; but something in its economy is clearly work- 
ing, and to the extent that this is its self-contained monetary policy, 
the Chinese may have the nineteenth century American Nationalists 
to thank, through their student Dr. Sun Yat-Sen. 

The Mystery of Chinese Productivity 

In the eighteenth century, Benjamin Franklin surprised his British 
listeners with tales of the booming economy in the American colonies, 
something he credited to the new paper fiat money issued debt-free by 
provincial governments. In a May 2005 article titled "The Mystery of 
Mr. Wu," Greg Grillot gave a modern-day variant of this story involv- 
ing a recent visit to China. He said he and a companion named Karim 
had interviewed a retired architect named Mr. Wu on his standard of 
living. Mr. Wu was asked through an interpreter, "How has your 
standard of living changed in the last two decades?" The interpreter 
responded, "Thirteen years ago, his pension was 250 yuan a month. 
Now it is 2,500 yuan. He recently had a cash offer to buy his home for 
US$300,000, which he's lived in for 50 years." Karim remarked to his 
companion, "Greg, something doesn't add up here. His pension shot 
up 900% in 13 years while inflation snoozed at 2-5% per annum. How 
could the government pay him that much more in such a short period 
of time?" Grillot commented: 

[T]he more you look around, the more you notice that no one 
seems to know, or care, how so many people can produce so 
much so cheaply . . . and sell it below production cost. How 


Web of Debt 

does the Chinese miracle work? Are the Chinese playing with 
economic fire? All over Beijing, you find people selling things 
for less than they must have cost to make. 

. . . Karim and I looked over the books of a Chinese steel 
company. Its year-over-year gross sales increased at a fine, steady 
clip . . . but despite these increasing sales, its debt ascended a bit 
faster than its sales. So its net profits slowly dwindled over time. 
. . . But it also looked like the company never pays down its debt. 
... If the Chinese aren't paying their debts. . . is there any limit 
to the amount of money the banks can lend? Just who are these 
banks, anyway? 

Could this be the key? . . . In the land of the world's greatest 
capitalists [meaning China], there's one business that isn't even 
remotely governed by free markets: the banks. In the simplest terms, 
the banks and the government are one and the same. Like modern 
American banks, the Chinese banks (read: the Chinese 
government) freely loan money to fledgling and huge established 
businesses alike. But unlike modern American banks (most of them, 
anyway), the Chinese banks don't expect businesses to pay back the 
money lent to them. 

Evidently the secret of Chinese national banking is that the gov- 
ernment banks are not balancing their books! Grillot concluded that it 
was a dangerous game: 

[E]ven if it's a deliberate policy, an economy can't be deliberately 
inefficient in allocating capital. Things cost money. They cannot, 
typically, cost less than the value of the raw materials to make 
them. The whole cannot be worth less than the sum of the parts. 
. . Some laws of economics . . . can be bent, but not broken ... at 
least not without consequences." 9 

Benjamin Franklin's English listeners would no doubt have said 
the same thing about the innovative monetary scheme of the American 
colonies. Or could Professor Liu be right? Our entire economic world 
view may need to be reordered, "just as physics was reordered when 
we realized that the earth is not stationary and is not the center of the 
universe." 10 

How the Chinese economy can function on credit that never gets 
repaid may actually be no more mysterious than the workings of the 
U.S. economy, which carries $9 trillion in federal debt that nobody 
ever expects to see repaid. The Chinese government can print its own 
money and doesn't need to go into debt. Before 1981, it had no federal 


Chapter 27 - Waking the Sleeping Giant 

debt at all; but when it opened to Western trade, it made a show of 
conforming to Western practices. Advances of credit intended for 
national development were re-characterized as "non-performing 
loans," rather like the English tallies that were re-characterized as 
"unfunded debt" at the end of the seventeenth century. As a result, 
today China does have a federal debt; but it remains substantially 
smaller than that of the United States. 11 China can therefore afford to 
let some struggling businesses carry perpetual debt on their books 

In both China and the United States, the money supply is 
continually being inflated; but the Chinese mechanism may be more 
efficient, because it does a better job of recycling the money. The new 
money from Chinese loans that may or may not get repaid goes into 
the pockets of laborers, increasing their wages and their pensions, 
giving them more money for producing and purchasing goods. Like 
in the early American colonies, China's newly-created money is 
increasing the overall productivity of its economy and the standard of 
living of its people, promoting the general welfare by leavening the 
whole loaf at once. In twenty-first century America, by contrast, the 
economy keeps growing mainly from "money making money." The 
proceeds go into the pockets of investors who already have more than 
they can spend on consumer goods. American tax relief also tends to 
go to these non-producing investors, while American workers are 
heavily taxed. Meanwhile, the Chinese government is cutting the taxes 
paid by workers and raising their salaries, in an effort to encourage 
more spending on cars and household appliances. The Chinese 
government recently eliminated rural taxes altogether. 12 

Another Blow to the Quantity Theory of Money 

In March 2006, the People's Bank of China reported that its M2 
money supply had increased by a whopping 18.8 percent from a year 
earlier. Under classical economic theory, this explosive growth should 
have crippled the economy with out-of-control price inflation; but it 
didn't. By early 2007, price inflation in China was running at only 2 
to 3 percent. In 2006, China pushed past France and Great Britain to 
become the world's fourth largest economy, with domestic retail sales 
boosted by 13 percent and industrial production by 16.6 percent. 13 As 
noted earlier, China has managed to keep the prices of its products 
low for thousands of years, although its money supply has continually 


Web of Debt 

been flooded with new currency that has poured in to pay for those 
cheap products. 14 The "economic mystery" of China may be explained 
by the Keynesian observation that when workers and raw materials 
are available to increase productivity, adding money ("demand") does 
not increase prices; it increases goods and services. Supply keeps up 
with demand, leaving prices unaffected. 

We've seen that the usual trigger of hyperinflation is not a freely 
flowing money supply but is the sudden devaluation of the currency 
induced by speculation in the currency market. China has so far man- 
aged to resist opening its currency to speculation; but Professor Liu 
warns that it has been engaged in a dangerous flirtation with foreign 
investors, who are continually leaning on it to bring its policies in line 
with the West's. China is "hoping to reap the euphoria of market 
fundamentalism without succumbing to this narcotic addiction," Liu 
writes, but "every addict begins with the confidence that he/ she can 
handle the drug without falling into addiction." 15 He observes: 

After two and a half decades of economic reform toward neo- 
liberal market economy, China is still unable to accomplish in 
economic reconstruction what Nazi Germany managed in four 
years after coming to power, i.e., full employment with a vibrant 
economy financed with sovereign credit without the need to 
export, which would challenge that of Britain, the then 
superpower. This is because China made the mistake of relying on 
foreign investment instead of using its own sovereign credit. The 
penalty for China is that it has to export the resultant wealth to pay 
for the foreign capital it did not need in the first place. The result 
after more than two decades is that while China has become a 
creditor to the US to the tune of nearing China's own gross 
domestic product (GDP), it continues to have to beg the US for 
investment capital. 16 

Liu's proposed solution to the international debt crisis is what he 
calls "sovereign credit" and what Henry Carey called "national credit": 
sovereign nations should pay their debts in their own currencies, issued 
by their own governments. Liu writes: 

Sovereign debts in local currency usually do not carry any default 
risk since the issuing government has the authority to issue 
money in domestic currency to repay its domestic debts. . . . 
[S]overeign debts' default risks are exclusively linked to foreign- 
currency debts and their impact on currency exchange rates. 
For this reason, any government that takes on foreign debt is recklessly 


Chapter 27 - Waking the Sleeping Giant 

exposing its economy to unnecessary risk from external sources. 17 

Although Liu says "the issuing government has the authority to 
issue money in domestic currency to repay its domestic debts," in the 
United States today, newly-created dollars are not issued by the U.S. 
Treasury. They originate with the privately-owned Federal Reserve 
or private commercial banks, which create the money in the form of 
loans. Like those governments that "take on foreign debt," the U.S. 
government will therefore never be able to cure its mounting debt crisis 
under the current system. The only way out may be the sort of 
Copernican revolution envisioned by Professor Liu, a Chinese 
American economist with his feet in two worlds. 

The Dragon and the Eagle 

Although China has been flirting with foreign capital investment, 
it has so far managed to retain the power to issue its own national 
currency. It has reportedly been using that sovereign power to print 
up renminbi and exchange them with Chinese companies for U.S. 
dollars, which are then used to buy U.S. securities, U.S. technology, 
and oil. 18 Washington can hardly complain, because the Chinese have 
been instrumental in helping the U.S. government bankroll its debt. 
The Japanese have also engaged in these maneuvers, evidently with 
U.S. encouragement. (See Chapter 40.) The problem with funding 
U.S. deficit spending with fiat money issued by foreign central banks 
is the leverage this affords America's competitors. According to a 
January 2005 Asia Times article, "All Beijing has to do is to mention 
the possibility of a sell order going down the wires. It would devastate 
the U.S. economy more than a nuclear strike." 19 If someone is going to be 
buying U.S. securities with money created with accounting entries, it 
should be the U.S. government itself. Why this would actually be less 
inflationary than what is going on now is discussed in Chapter 39. 

Ironically, the Dragon has risen to challenge the Eagle's hegemony 
by adopting a monetary scheme that was made in America. For the 
United States to get back the chips it has lost in the global casino, it 
may need to return to its roots and adopt the financial cornerstone the 
builders rejected. It may need to do this for another reason: its debt- 
ridden economy could be on the brink of collapse. Like for Lincoln in 
the 1860s, the only way out may be the Greenback solution. We'll 
look at that challenge in Section IV, after considering one more 
interesting Asian phenomenon .... 


Chapter 28 

Of course the truck was a thousand times bigger than any of the 
mice who were to draw it. But when all the mice had been harnessed, 
they were able to pull it quite easily. 

- The Wonderful Wizard ofOz, 
"The Queen of the Field Mice" 

India is a second sleeping giant that is shaking off its ancient 
slumber. Once called the jewel in the crown of the British Empire, 
it was the very symbol of imperialism. Today India and China together 
are called the twin engines of economic growth for the twenty-first 
century. Combined, they represent two-fifths of the world's 
population. Mahatma Gandhi unleashed the collective power of the 
Indian people in the 1940s, when he helped bring about the country's 
independence by leading a mass non-violent resistance movement 
against the British. India celebrated its freedom in 1947. But in the 
next half century, the entrenched moneyed interests managed to regain 
their dominance by other means. 

According to a PBS documentary called "Commanding Heights," 
in the 1950s India was a Mecca for economists, who poured in from 
all over the world to advise the Indian government on how to set up 
the model economy. Their advice was generally that it should have a 
state-led model of industrial growth, in which the public or government 
sector would occupy the "commanding heights" of the economy. 


Chapter 28 - Recovering the Jewel of the British Empire 

Gandhi's economic ideal was a simple India of self-sufficient villages; 
but Pandhit Nehru, the country's first prime minister, wanted to 
industrialize and combine British parliamentary democracy with 
Soviet-style central planning. In the prototype that resulted, all areas 
of heavy industry - steel, coal, machine tools, capital goods - were 
government-owned; but India added a democratically-elected 
government with a Parliament and a prime minister. The country 
became the model of economic development for newly independent 
nations everywhere, the leader for the Third World in planning, 
government ownership, and control. 1 

Helping to shape the economics of Nehru and his successor Indira 
Gandhi in the 1960s was celebrated American economist John Ken- 
neth Galbraith, who was appointed ambassador to India by President 
John F. Kennedy. Galbraith believed that the government had an ac- 
tive role to play in stimulating the economy through public spending. 
He wrote and advised on public sector institutions and recommended 
the nationalization of banks, airlines and other industries. India's banks 
were nationalized in 1969. 

Disillusionment with the promise of Indian independence set in, 
however, as the private interests that had controlled colonial India 
continued to pull the strings of the new Indian State. In 1973, the 
country had a positive trade balance; but that was before OPEC entered 
into an agreement to sell oil only in U.S. dollars. In 1974, the price of 
oil suddenly quadrupled. India had total foreign exchange reserves of 
only $629 million to pay an annual oil import bill of $1,241 million, 
almost double its available reserves. It therefore had to get U.S. dollars, 
and to do that it had to incur foreign debt and divert farming and 
other industry to products that would sell on foreign markets. In 1977, 
Indira Gandhi was forced into elections, in which key issues were the 
IMF and the domestic "austerity" measures the IMF invariably imposed 
in return for international loans. Indira was pushed out and was 
replaced with a regime friendlier to the globalist agenda. Engdahl 
writes, "the heavy hand of Henry Kissinger was present ... in close 
coordination with the British." 2 

India's recent economic history was detailed in a 2005 article by a 
non-partisan research group in Mumbai, India, called the Research 
Unit for Political Economy (R.U.P.E.). It states that India's development 
was supposed to have been carried out free of powerful foreign and 
domestic private interests; but the economy wound up tailored to those 
very interests, which the authors describe darkly as "large domestic 


Web of Debt 

and foreign capitalists; landlords and other feudal sections; big traders 
and other parasitic forces." The government embarked on a policy of 
engaging in investment by expanding external and internal debt. Loan 
money was accepted from the IMF even when there was no immediate 
compulsion to do it. Annual economic growth increased, but it was 
largely growth in the "unproductive" industries of finance and 
defense. External debt ballooned from $19 billion in 1980, to $37 billion 
in 1985, to $84 billion in 1990, culminating in a balance of payments 
crisis in 1990-91 and a crippling IMF "structural adjustment" loan. 
After 1995, the policies advocated by the World Bank were reinforced 
by the stringent requirements of the newly-formed World Trade 
Organization. According to the R.U.P.E. group: 

For the people at large the development of events has been 
devastating. The relative stability of certain sections - middle 
peasants, organised sector workers, educated employees and 
teachers - evaporated; and those whose existence was already 
precarious plummeted. It took time for people to arrive at the 
perception that what was happening was not merely a series of 
individual tragedies, but a broader social calamity linked to 
official policy. As they did so, they expressed their anger in 
whatever way they could, generally by throwing out whichever 
party was in power .... 

Yet the [new government] follows, indeed must follow, 
broadly the same policies as its predecessor. Any attempt to 
slow the pace is met with rebukes and pressure from imperialist 
countries and the domestic corporate sector. Indeed, there is no 
longer any need for them to intervene explicitly. With the last 
14 years of financial liberalisation, the country is now 
enormously vulnerable to volatile capital flows. This fact alone 
would rule out any serious populist exercise: for the resources 
required would have to be gathered either from increased 
taxation or from fiscal deficits, either of which would alienate 
foreign speculators and could precipitate a sudden outflow of 
capital. 3 


Chapter 28 - Recovering the Jewel of the British Empire 

Miracles for Investors, Poverty for Workers 

Like other Third World countries, India has been caught in the 
trap of accepting foreign loans and investment, making it vulnerable 
to sudden capital flows, subjecting it to the whims and wishes of foreign 
financial powers. Countries that have been lured into this trap have 
wound up seeking financial assistance from the IMF, which has then 
imposed "austerity policies" as a condition of debt relief. These 
austerities include the elimination of food program subsidies, reduction 
of wages, increases in corporate profits, and privatization of public 
industry. All sorts of public assets go on the block - power companies, 
ports, airlines, railways, even social-welfare services. Canadian critic 
Wayne Ellwood writes of this "privatization trap": 

Dozens of countries and scores of public enterprises around the 
world have been caught up in this frenzy, many with little choice. 
. . . [C]ountries forced to the wall by debt have been pushed into 
the privatization trap by a combination of coercion and 
blackmail. . . . How much latitude do poor nations have to reject 
or shape adjustment policies? Virtually none. The right of 
governments ... to make sovereign decisions on behalf of their citizens 
- the bottom line of democracy - is simply jettisoned. 4 

In theory, these structural adjustment programs also benefit local 
populations by enhancing the efficiency of local production, something 
that supposedly happens as a result of exposure to international 
competition in investment and trade. But their real effect has been 
simply to impose enormous hardships on the people. Food and 
transportation subsidies, public sector layoffs, curbs on government 
spending, and higher interest and tax rates all hit the poor 
disproportionately hard. 5 Helen Caldicott, M.D., co-founder of 
Physicians for Social Responsibility, writes: 

Women tend to bear the brunt of these IMF policies, for they 
spend more and more of their day digging in the fields by hand 
to increase the production of luxury crops, with no machinery 
or modern equipment. It becomes their lot to help reduce the 
foreign debt, even though they never benefited from the loans in 
the first place. . . . Most of the profits from commodity sales in 
the Third World go to retailers, middlemen, and shareholders in 
the First World. . . . UNICEF estimates that half a million children 
die each year because of the debt crisis. 6 


Web of Debt 

Countries have been declared "economic miracles" even when their 
poverty levels have increased. The "miracle" is achieved through a 
change in statistical measures. The old measure, called the gross 
national product or GNP, attributed profits to the country that received 
the money. The GNP included the gross domestic product or GDP 
(the total value of the output, income and expenditure produced within 
a country's physical borders) plus income earned from investment or 
work abroad. The new statistical measure looks simply at GDP. Profits 
are attributed to the country where the factories, mines, or financial 
institutions are located, even if the profits do not benefit the country 
but go to wealthy owners abroad. 7 

In 1980, median income in the richest 10 percent of countries was 
77 times greater than in the poorest 10 percent. By 1999, that gap had 
grown to 122 times greater. In December 2006, the United Nations 
released a report titled "World Distribution of Household Wealth," 
which concluded that 50 percent of the world's population now owns 
only 1 percent of its wealth. The richest 1 percent own 40 percent of all 
global assets, with the 37 million people making up that 1 percent all 
having a net worth of $500,000 or more. The richest 10 percent of 
adults own 85 percent of global wealth. Under current conditions, 
the debts of the poorer nations can never be repaid but will just con- 
tinue to grow. Today more money is flowing back to the First World in the 
form of debt service than is flowing out in the form of loans. By 2001, 
enough money had flowed back from the Third World to First World 
banks to pay the principal due on the original loans six times over. 
But interest consumed so much of those payments that the total debt 
actually quadrupled during the same period. 8 

China and India: Ahead of the Pack 

The statistics for most Third World countries are dismal, but India 
has done better than most. China, which is politically still Communist, 
is technically part of the "Second World," but it too has had serious 
struggles with poverty. Advocates of the free-market approach rely 
largely on data from China and India to show that the approach is 
working to reduce poverty, but as Christian Weller and Adam Hersh 
wryly observed in a 2002 editorial: 

[T]o use India and China as poster children for the IMF/ World 
Bank brand of liberalization is laughable. Both nations have 
sheltered their currencies from global speculative pressures (a serious 


Chapter 28 - Recovering the Jewel of the British Empire 

sin, according to the IMF). Both have been highly protectionist 
(India has been a leader of the bloc of developing nations resisting 
WTO pressures for laissez-faire openness). And both have relied 
heavily on state-led development and have opened to foreign 
capital only with negotiated conditions. 9 

The declines in poverty in China and India occurred largely before 
the big strides in foreign trade and investment of the 1990s. Something 
else has contributed to their economic resilience, and one likely 
contributor is that both countries have succeeded in protecting their 
currencies from speculators. Both were largely insulated from the 
Asian crisis of the 1990s by their governments' refusal to open the 
national currency to foreign speculation. In India, as in in China, 
private banking has made some inroads; but in 2006, 80 percent of 
India's banks were still owned by the government. 10 Government 
ownership has not made these banks inefficient or uncompetitive. A 
2001 study of consumer satisfaction found that the State Bank of India 
ranked highest in all areas scored, beating both domestic and foreign 
private banks and financing institutions. 11 

A Country of Many States and Disparities 

Differing assessments of how India is faring may be explained by 
the fact that it is a very large country divided into many states, with 
economic policies that differ. In a June 2005 article in the London 
Observer, Greg Palast noted that in those Indian states where globalist 
free trade policies have been imposed, workers have been reduced to 
sweatshop conditions due to murderous competition between workers 
without union protection. But these are not the states where Microsoft 
and Oracle are finding their highly-skilled computer talent. In those 
states, says Palast, the socialist welfare model is alive and thriving: 

The computer wizards of Bangalore (in Karnataka state) and 
Kerala are the products of fully funded state education systems 
where, unlike the USA, no child is left behind. A huge apparatus 
of state-owned or state-controlled industries, redistributionist tax 
systems, subsidies of necessities from electricity to food, tight 
government regulation and affirmative action programs for the 
lower castes are what has created these comfortable refuges for 
Oracle and Microsoft. 


Web of Debt 

. . . What made this all possible was not capitalist competitive 
drive (there was no corporate "entrepreneur" in sight), but the 
state's investment in universal education and the village's 
commitment to development of opportunity, not for a lucky few, 
but for the entire community. The village was 100% literate, 
100% unionized, and 100% committed to sharing resources 
through a sophisticated credit union finance system. 12 

Conditions are much different in the state of Andhra Pradesh, 
where farming has been the target of a "poverty eradication" pro- 
gram of the British government. Andhra Pradesh has the highest 
number of farmer suicides in India. These tragedies have generally 
followed the amassing of unrepayable debts for expensive seeds and 
chemicals for export crops that did not produce the promised returns. 
An April 2005 article in the British journal Sustainable Economics 
traced the problem to a project called "Vision 2020": 

[T]he UK's Department for International Development (DFID) 
and World Bank were financing a project, Vision 2020 [which] 
aimed to transform the state to an export led, corporate 
controlled, industrial agriculture model that was thought likely 
to displace up to 20 million people from the land by 2020. There 
were no ideas or planning for what such displaced millions were 
to do and despite these fundamental and profound upheavals 
in the food system, there had been little or no involvement of 
small farmers and rural people in shaping this policy. 

Vision 2020 was backed by a loan from the World Bank and 
was to receive £100 million of UK aid, 60% of all DFID's aid 
budget to India. . . . There were about 3000 farmer suicides in 
Andhra Pradesh in the 4 years prior to the May 2004 election 
and since the election there have been 1300 further suicides. 13 

Vendana Shiva, one of the article's co-authors, later put the num- 
ber of farmer suicides at 150,000 in the decade before 2006. 14 Shiva 
and co-authors noted that India's farmers, who make up 70 percent 
of the population, voted out the existing coalition government in May 
2004; but the new leaders too had to take their marching orders from 
the World Bank, the World Trade Organization (WTO) and multina- 
tional corporations. They observed that a growing number of laws 
and policies are being pushed through the legislature that threaten to 
rob the poor of their seeds, their food, their health and their liveli- 
hoods, including: 


Chapter 28 - Recovering the Jewel of the British Empire 

• A new patent ordinance that introduces product patents on seeds 
and medicines, putting them beyond people's reach. Prices in- 
crease 10- to 100-fold under patent monopolies. Since India is also 
the source of low-cost generic medicines for Africa, the introduc- 
tion of patent monopolies in India is likely to increase debt and 
poverty globally. 

• New policies for water privatization have been introduced, includ- 
ing privatization of Delhi's water supply, pushing water tariffs up 
by 10 to 15 times. The policies threaten to deprive the poor of their 
fundamental right to water, diverting scarce incomes to pay wa- 
ter bills that are 10 times higher than needed to cover the cost of 
operations and maintenance. 

• The removal of regulations on prices and volumes, allowing giant 
corporations to set up private markets, destroying local markets 
and local production. India produces thousands of crops on mil- 
lions of farms, while agribusiness trades in only a handful of com- 
modities. Their new central role in much less regulated Indian 
markets is likely to result in destruction of diversity and displace- 
ment of small producers and traders. 

India's poor, however, are not taking all this lying down. Following 
Gandhi's example of mass non-cooperation with oppressive British 
laws, they have organized a nation-wide movement against the patent 
ordinance. Communities are creating "freedom zones" to protect 
themselves from corporate invasion in areas such as genetically 
modified seeds, pesticides, unfair contracts, and monopolistic markets. 
The grassroots movement has called for a rethinking of GATT (the 
General Agreement on Tariffs and Trade), which led to the creation of 
the WTO in 1995. The WTO requires the laws of every member to 
conform to its own and has the power to enforce compliance by 
imposing sanctions. 15 

The WTO and the NWO 

The United States is also a member of the WTO. Critics warn that 
Americans could soon be seeing international troops in their own 
streets. The "New World Order" that was heralded at the end of the 
Cold War was supposed to be a harmonious global village without 
restrictions on trade and with cooperative policing of drug-trafficking, 


Web of Debt 

terrorism and arms controls. But to the wary, it is the road to a one- 
world government headed by transnational corporations, oppressing 
the public through military means and restricting individual freedoms. 
Bob Djurdjevic, writing in the paleoconservative journal Chronicles 
in 1998, compared the NWO to the old British empire: 

Parallels between the British Empire and the New World 
Order Empire are striking. It's just that the British crown relied 
on brute force to achieve its objectives, while the NWO elite 
mostly use financial terrorism . . . The British Empire was built 
by colonizing other countries, seizing their natural resources, 
and shipping them to England to feed the British industrialists' 
factories. In the wake of the "red coats" invasions, local cultures 
were often trampled and replaced by a "more progressive" British 
way of life. 

The Wall Street-dominated NWO Empire is being built by 
colonizing other countries with foreign loans or investments. 
When the fish is firmly on the hook, the NWO financial terrorists 
pull the plug, leaving the unsuspecting victim high and dry. And 
begging to be rescued. In comes the International Monetary 
Fund (IMF). Its bailout recipes - privatization, trade 
liberalization and other austerity reforms - amount to seizing 
the target countries' natural and other resources, and turning 
them over to the NWO elites - just as surely as the British Empire 
did by using cruder methods. 16 

Americans tend to identify with these Wall Street banks and 
transnational corporations because they have U.S. addresses, but 
Djurdjevic warns that the international cartels do not necessarily have 
our best interests in mind. To the contrary, Main Street America 
appears to be their next takeover target .... 


Section IV 


"We are all threatened, " answered the tiger, "by a fierce enemy 
which has lately come into this forest. It is a most tremendous monster, 
like a great spider, with a body as big as an elephant and legs as long 
as a tree trunk. . . . [A]s the monster crawls through the forest he seizes 
an animal with a leg and drags it to his mouth, where he eats it as a 
spider does a fly. Not one of us is safe while this fierce creature is alive. " 

- The Wonderful Wizard ofOz, 
"The Lion Becomes the King of Beasts" 

Chapter 29 

"I worked harder than ever; but I little knew how cruel my enemy 
could be. She made my axe slip again, so that it cut right through my 
body. " 

- The Wonderful Wizard ofOz, 
"The Rescue of the Tin Woodman" 

The mighty United States has been in the banking spider's 
sights for more than two centuries. This ultimate prize too 
may finally have been captured in the spider's web, choked in debt 
spun out of thin air. The U.S. has now surpassed even Third World 
countries in its debt level. By 2004, the debt of the U.S. government 
had hit $7.6 trillion, more than three times that of all Third World 
countries combined. Like the bankrupt consumer who stays afloat by 
making the minimum payment on his credit card, the government 
has avoided bankruptcy by paying just the interest on its monster debt; 
but Comptroller General David M. Walker warns that by 2009 the 
country may not be able to afford even that mounting bill. When the 
government cannot service its debt, it will have to declare bankruptcy, 
and the economy will collapse. 1 

Al Martin is a retired naval intelligence officer, former contributor 
to the Presidential Council of Economic Advisors, and author of a 
weekly newsletter called "Behind the Scenes in the Beltway." He ob- 
served in an April 2005 newsletter that the ratio of total U.S. debt to 
gross domestic product (GDP) rose from 78 percent in 2000 to 308 
percent in April 2005. The International Monetary Fund considers a 


Chapter 29 - Breaking the Back of the Tin Man 

nation-state with a total debt-to-GDP ratio of 200 percent or more to 
be a "de-constructed Third World nation-state." Martin wrote: 

What "de-constructed" actually means is that a political regime 
in that country, or series of political regimes, have, through a 
long period of fraud, abuse, graft, corruption and 
mismanagement, effectively collapsed the economy of that 
country. 2 

Other commentators warn that the "shock therapy" tested in Third 
World countries is the next step planned for the United States. 
Editorialist Mike Whitney wrote in CounterPunch in April 2005: 

[T]he towering national debt coupled with the staggering trade 
deficits have put the nation on a precipice and a seismic shift in 
the fortunes of middle-class Americans is looking more likely all 
the time. . . . The country has been intentionally plundered and 
will eventually wind up in the hands of its creditors .... This 
same Ponzi scheme has been carried out repeatedly by the IMF 
and World Bank throughout the world .... Bankruptcy is a fairly 
straightforward way of delivering valuable public assets and resources 
to collaborative industries, and of annihilating national sovereignty. 
After a nation is successfully driven to destitution, public policy 
decisions are made by creditors and not by representatives of the 
people. . . . The catastrophe that middle class Americans face is 
what these elites breezily refer to as "shock therapy"; a sudden 
jolt, followed by fundamental changes to the system. In the 
near future we can expect tax reform, fiscal discipline, 
deregulation, free capital flows, lowered tariffs, reduced public 
services, and privatization. 3 

Catherine Austin Fitts was formerly the managing director of a 
Wall Street investment bank and was Assistant Secretary of the De- 
partment of Housing and Urban Development (HUD) under Presi- 
dent George Bush Sr. She calls what is happening to the economy "a 
criminal leveraged buyout of America," something she defines as "buy- 
ing a country for cheap with its own money and then jacking up the 
rents and fees to steal the rest." She also calls it the "American Tape- 
worm" model: 

[T]he American Tapeworm model is to simply finance the federal 
deficit through warfare, currency exports, Treasury and federal 
credit borrowing and cutbacks in domestic "discretionary" 
spending. . . . This will then place local municipalities and local 


Web of Debt 

Share of capital income earned by top 1 % and bottom 80%, 
1979-2003 (Shapiro & Friedman, 2006 4 ) 


leadership in a highly vulnerable position - one that will allow 
them to be persuaded with bogus but high-minded sounding 
arguments to further cut resources. Then, to "preserve bond 
ratings and the rights of creditors," our leaders can be persuaded 
to sell our water, natural resources and infrastructure assets at 
significant discounts of their true value to global investors. . . . 
This will all be described as a plan to "save America" by 
recapitalizing it on a sound financial footing. In fact, this process 
will simply shift more capital continuously from America to other 
continents and from the lower and middle classes to elites. 5 

The Destruction of the Great American Middle Class 

In 1894, Jacob Coxey warned of the destruction of the great 
American middle class. That prediction is rapidly materializing, as the 
gap between rich and poor grows ever wider. The Federal Reserve 
reported in 2004 that: 

• The wealthiest 1 percent of Americans held 33.4 percent of the 
nation's wealth, up from 30.1 percent in 1989; while the top 5 
percent held 55.5 percent of the wealth. 


Chapter 29 - Breaking the Back of the Tin Man 

• The poorest 50 percent of the population held only 2.5 percent of 
the wealth, down from 3.0 percent in 1989. 

• The very wealthiest 1 percent of Americans owned a bigger piece 
of the pie (33.4 percent) than the poorest 90 percent (30.4 percent 
of the pie). They also owned 62.3 percent of the nation's business 

• The wealthiest 5 percent owned 93.7 percent of the value of bonds, 
71.7 percent of nonresidential real estate, and 79.1 percent of the 
nation's stocks. 6 

Forbes Magazine reported that from 1997 to 1999, the wealth of 
the 400 richest Americans grew by an average of $940 million each, 
for a daily increase of $1.3 million per person. 7 Note that lists of this 
sort do not include the world's truly richest families, including the 
Rothschilds, the Warburgs, and a long list of royal families. Whether 
they consider it to be in bad taste or because they fear retribution from 
the bottom of the wealth pyramid, the super-elite do not make their 
fortunes public. 

Debt Peonage: Eroding the Protection of the Bankruptcy Laws 

While the super-rich are amassing fortunes rivaling the economies 
of small countries, Americans in the lower brackets are struggling with 
food and medical bills. Personal bankruptcy filings more than doubled 
from 1995 to 2005. In 2004, more than 1.1 million consumers filed for 
bankruptcy under Chapter 7. A Chapter 7 bankruptcy stays on the 
debtor's credit record for ten years from the date of filing, but at least 
it wipes the slate clean. In 2005, however, even that escape was taken 
away for many debtors. Under sweeping new provisions to the 
Bankruptcy Code, many more people are now required to file under 
Chapter 13, which does not eliminate debts but mandates that they be 
repaid under a court-ordered payment schedule over a three to five 
year period. 

Homestead exemptions have traditionally protected homes from 
foreclosure in bankruptcy; but not all states have them, and the statutes 
usually preserve only a fraction of the home's worth. Worse, the new 
bankruptcy provisions require home ownership for a minimum of 40 
months to qualify for the exemption. That means that if you file for 
bankruptcy within 3.3 years of purchase, your home is no longer off 


Web of Debt 

limits to creditors. 8 In the extreme case, the homeowner could not just 
lose his home but could owe a "deficiency," or balance due, for 
whatever the creditor bank failed to get from resale. This balance 
could be taken from the debtor's paychecks over a five-year period. In 
some states, "anti-deficiency" laws prevent this, allowing the purchaser 
to walk away without paying the balance owed. But again not all 
states have them, and they apply only to the original mortgage on the 
home. If the buyer takes out a second mortgage or takes equity out of 
the home, anti-deficiency laws may not apply. The push to persuade 
homeowners to take out home equity loans recalls the 1920s campaign 
to persuade people to borrow against their homes to invest in the stock 
market. When the stock market crashed, their homes became the 
property of the banks. Elderly people burdened with medical and 
drug bills are particularly susceptible to those tactics today. 

Another insidious change that has been made in the bankruptcy 
laws pertains to insolvent corporations. The law originally provided 
for the appointment of an independent bankruptcy trustee, whose job 
was to try to keep the business running and preserve the jobs of the 
workers. In the 1970s, the law was changed so that the plan of 
bankruptcy reorganization would be designed by the banks that were 
financing the restructuring. The creditors now came first and the 
workers had to take what was left. The downsizing of the airline 
industry, the steel industry, and the auto industry followed, 
precipitating masses of worker layoffs. 9 

Normally, it would fall to the individual States to provide a safety 
net for their citizens from personal disasters of this sort, but the States 
have been driven to the brink of bankruptcy as well. Diversion of 
State funds to out-of-control federal spending has left States with bud- 
get crises that have forced them to take belt-tightening measures like 
those seen in Third World countries. Social services have been cut for 
those most in need during an economic downturn, including services 
for childcare, health insurance, income support, job training programs 
and education. Social services are "discretionary" budget items, which 
have been sacrificed to the fixed-interest income of the creditors who 
are first in line to get paid. 10 

Billionaire philanthropist Warren Buffett has warned that America, 
rather than being an "ownership society," is fast becoming a 
"sharecroppers' society." Paul Krugman suggested in a 2005 New 
York Times editorial that the correct term is "debt peonage" society, 
the system prevalent in the post-Civil War South, when debtors were 


Chapter 29 - Breaking the Back of the Tin Man 

forced to work for their creditors. American corporations are assured 
of cheap, non-mobile labor of the sort found in Third World countries 
by a medical insurance system and other benefits tied to employment. 
People dare not quit their jobs, however unsatisfactory, for fear of 
facing medical catastrophes without insurance, particularly now that 
the escape hatch of bankruptcy has narrowed substantially. Most 
personal bankruptcies are the result of medical emergencies and other 
severe misfortunes such as job loss or divorce. The Bankruptcy Reform 
Act of 2005 eroded the protection the government once provided 
against these unexpected catastrophes, ensuring that working people 
are kept on a treadmill of personal debt. Meanwhile, loopholes allowing 
very wealthy people and corporations to go bankrupt and to shield 
their assets from creditors remain intact. 11 

Graft and Greed in the Credit Card Business 

The 2005 bankruptcy bill was written by and for credit card 
companies. Credit card debt reached $735 billion by 2003, more than 
11 times the tab in 1980. Approximately 60 percent of credit card 
users do not pay off their monthly balances; and among those users, 
the average debt carried on their cards is close to $12,000. This "sub- 
prime" market is actually targeted by banks and credit card companies, 
which count on the poor, the working poor and the financially 
strapped to not be able to make their payments. According to a 2003 
book titled The Two-Income Trap by Warren and Tyagi: 

More than 75 percent of credit card profits come from people 
who make those low, minimum monthly payments. And who 
makes minimum monthly payments at 26 percent interest? Who 
pays late fees, over-balance charges, and cash advance 
premiums? Families that can barely make ends meet, households 
precariously balanced between financial survival and complete 
collapse. These are the families that are singled out by the lending 
industry, barraged with special offers, personalized 
advertisements, and home phone calls, all with one objective in 
mind: get them to borrow more money. 

"Payday" lender operations offering small "paycheck advance" 
loans have mushroomed. Particularly popular in poor and minority 
communities, they can carry usurious interest rates as high as 500 
percent. The debt crisis has been blamed on the imprudent spending 
habits of people buying frivolous things; but Warren and Tyagi ob- 


Web of Debt 

serve that two-income families are actually spending 21 percent less 
on clothing, 22 percent less on food, and 44 percent less on appli- 
ances than one-income families spent a generation earlier. The rea- 
son is that they are spending substantially more on soaring housing 
prices and medical costs. 12 

In 2003, the average family was spending 69 percent more on 
home mortgage payments in inflation-adjusted dollars than their 
parents spent a generation earlier, and 61 percent more on health 
needs. At the same time, real wages had stagnated or declined. Most 
people were struggling to get by with less; and in order to get by, 
many turned to credit cards to pay for basic necessities. Credit card 
companies and their affiliated banks capitalize on the extremity of 
poor and working-class people by using high-pressure tactics to sign 
up borrowers they know can't afford their loans, then jacking up 
interest rates or forcing customers to buy "insurance" on the loans. 13 
People who can make only minimal payments on their credit card 
bills wind up in "debt peonage" to the banks. The scenario recalls the 
sinister observation made in the Hazard Circular circulated during 
the American Civil War: 

[Sjlavery is but the owning of labor and carries with it the care 
of the laborers, while the European plan, led by England, is that 
capital shall control labor by controlling wages. This can be done by 
controlling the money. The great debt that capitalists will see to it 
is made out of the war, must be used as a means to control the 
volume of money. 

The slaves kept in the pre-Civil War South had to be fed and cared 
for. People enslaved by debt must feed and house themselves. 

Usurious Loans of Phantom Money 

The ostensible justification for allowing lenders to charge whatever 
interest the market will bear is that it recognizes the time value of 
money. Lenders are said to be entitled to this fee in return for foregoing 
the use of their money for a period of time. That argument might 
have some merit if the lenders actually were lending their own money, 
but in the case of credit card and other commercial bank debt, they 
aren't. They aren't even lending their depositors' money. They are lending 
nothing but the borrower's own credit. We know this because of what 
the Chicago Fed said in "Modern Money Mechanics": 


Chapter 29 - Breaking the Back of the Tin Man 

Of course, [banks] do not really pay out loans from the money 
they receive as deposits. If they did this, no additional money 
would be created. What they do when they make loans is to accept 
promissory notes in exchange for credits to the borrowers' transaction 
accounts. Loans (assets) and deposits (liabilities) both rise [by 
the same amount]. 14 

Here is how the credit card scheme works: when you sign a 
merchant's credit card charge slip, you are creating a "negotiable 
instrument." A negotiable instrument is anything that is signed and 
convertible into money or that can be used as money. The merchant 
takes this negotiable instrument and deposits it into his merchant's 
checking account, a special account required of all businesses that 
accept credit. The account goes up by the amount on the slip, 
indicating that the merchant has been paid. The charge slip is 
forwarded to the credit card company (Visa, MasterCard, etc.), which 
bundles your charges and sends them to a bank. The bank then sends 
you a statement, which you pay with a check, causing your transaction 
account to be debited at your bank. At no point has a bank lent you 
its money or its depositors' money. Rather, your charge slip (a 
negotiable instrument) has become an "asset" against which credit 
has been advanced. The bank has done nothing but monetize your 
own I.O.U. or promise to repay. 15 

When you lend someone your own money, your assets go down by 
the amount that the borrower's assets go up. But when a bank lends 
you money, its assets go up. Its liabilities also go up, since its deposits 
are counted as liabilities; but the money isn't really there. It is simply a 
liability - something that is owed back to the depositor. The bank 
turns your promise to pay into an asset and a liability at the same 
time, balancing its books without actually transferring any pre-exist- 
ing money to you. 

The spiraling debt trap that has subjected financially-strapped 
people to usurious interest charges for the use of something the lenders 
never had to lend is a fraud on the borrowers. In 2006, profits to 
lenders from interest charges and late fees on U.S. credit card debt 
came to $90 billion. An alternative for retaining the benefits of the 
credit card system without feeding a parasitic class of unnecessary 
middlemen is suggested in Chapter 41. 


Chapter 30 

"There's no place like home, there's no place like home, there's no 
place like home . . . ." 

If the bait that caught Third World countries in the bankers' 
debt web was the promise of foreign loans and investment, for 
Americans in the twenty-first century it is the lure of home ownership 
and the promise of ready cash from home equity loans. Increased 
rates of home ownership have been cited as a bright spot for labor in 
an economy in which workers continue to struggle. In 2004, home 
ownership was touted as being at all-time highs, hitting nearly 69 
percent that year. 1 The figure, however, was highly misleading. Sixty- 
nine percent of individuals obviously did not own their own homes. 
The figure applied only to "households." And while legal title might 
be in the name of the buyer, the home wasn't really "owned" by the 
household until the mortgage was paid off. Only 40 percent of homes 
were owned "free and clear," and that figure included properties 
owned as second homes, as vacation homes, and by landlords who 
rented the property out to non-homeowners. Even homes that were 
at one time owned free and clear could have mortgages on them, 
after the owners were lured by lenders into taking cash out through 
home equity loans. As a result of refinancing and residential mobil- 
ity, most mortgages on single-family properties today are less than 
four years old, which means they have a long way to go before they 
are paid off. 2 And if the mortgages are less than 3.3 years old, the 
homes are not subject to the homestead exemption and can be taken 
by the banks even if the strapped debtors file for bankruptcy. 


Chapter 30 - The Lure In The Consumer Debt Trap 

The touted increase in "home 
ownership" actually means an in- 
crease in debt. Households today 
owe more debt relative to their dis- 
posable income than ever before. 
In late 2004, mortgage debt 
amounted to 85 percent of dispos- 
able income, a record high. The 
fact that interest rates approached 
historic lows appeared to keep 
payments manageable, but the 
total amount of debt rose faster for 
the typical family than interest 
rates declined. As a result, house- 
holds still ended up paying a 
greater share of their incomes for 
their mortgages. Total U.S. mortgage debt increased by over 80 per- 
cent between 1991 and 2001, and residential debt grew another 50 
percent between 2001 and 2005. From 2001 through 2005, outstand- 
ing mortgage debt rose from $5.3 trillion to $8.9 trillion, the biggest 
debt expansion in history. In 2004, U.S. household debt increased 
more than twice as fast as disposable income; and most of this new 
debt-money came from the housing market. Homeowners took eq- 
uity out of their homes through home sales, refinancings and home 
equity loans totaling about $700 billion in 2004, more than twice the 
$266 billion taken five years earlier. Debts due to residential mort- 
gages exceeded $8.1 trillion, a sum larger even than the out-of-control 
federal debt, which hit $7.6 trillion the same year. 3 

Baiting the Trap: Seductively Low Interest Rates 
and "Teaser Rates" 

The housing bubble was another ploy of the Federal Reserve and 
the banking industry for pumping accounting-entry money into the 
economy. In the 1980s, the Fed reacted to a stock market crisis by 
lowering interest rates, making investment money readily available, 
inflating the stock market to unprecedented heights in the 1990s. When 
the stock market topped out in 2000 and started downward, the Fed 
could have allowed it to correct naturally; but that alternative was 
politically unpopular, and it would have meant serious losses to the 

Household Debt Ratio 

Grandfather Economic Reports 
http: //tnvvtiodges .home.att .netf 
data Fed Reserve 


Web of Debt 

banks that owned the Fed. The decision was made instead to prop up 
the market with even lower interest rates. The federal funds rate was 
dropped to 1.0 percent, launching a credit expansion that was even 
greater than in the 1990s, encouraging further speculation in both 
stocks and real estate. 4 

After the Fed set the stage, banks and other commercial lenders 
fanned the housing boom into a blaze with a series of high-risk changes 
in mortgage instruments, including variable rate loans that allowed 
nearly anyone to qualify to buy a home who was willing to take the 
bait. By 2006, about half of all U.S. mortgages were at "adjustable" 
interest rates. Purchasers were lulled by "teaser" rates into believing 
they could afford mortgages that in fact were liable to propel them 
into inextricable debt if not into bankruptcy. Property values had 
gotten so high that the only way many young couples could even 
hope to become homeowners was to agree to an adjustable rate mort- 
gage or ARM, a very risky type of mortgage loan in which the interest 
rate and payments fluctuate with market conditions. The risks of 
ARMs were explained in a December 2005 press release by the Office 
of the Comptroller of the Currency: 

[T]he initial lower monthly payment means that less principal is 
being paid. As a result, the loan balance grows, or amortizes 
negatively until the sixth year when payments are adjusted to 
ensure the principal is paid off over the remaining 25 years of 
the loan. In the case of a typical $360,000 payment option 
mortgage that starts at 6 percent interest, monthly payments could 
increase by 50 percent in the sixth year if interest rates do not change. 
If rates jump two percentage points, to 8 percent, monthly payments 
could double. 5 

Homeowners agreeing to this arrangement were gambling that 
either their incomes would increase to meet the payment burden or 
that the housing market would continue to go up, allowing them to 
sell the home before the sixth year at a profit. But by 2006, the housing 
bubble was topping out; and as in every Ponzi scheme, the vulnerable 
buyers who got in last would be left holding the bag when the bubble 

Even borrowers with fixed rate mortgages can wind up paying 
quite a bit more than they anticipated for their homes. Loans are 
structured so that the borrower who agrees to a 30-year mortgage at a 
fixed rate of 7 percent will actually pay about 2-1/2 times the list price 
of the house over the course of the loan. A house priced at $330,000 


Chapter 30 - The Lure In The Consumer Debt Trap 

at 7 percent interest would accrue $460,379.36 in interest, for a total 
tab of $790,379.36. 6 The bank thus actually gets a bigger chunk of the 
pie than the seller, although it never owned either the property or the 
loan money, which was created as it was lent; and home loans are 
completely secured, so the risk to the bank is very low. The buyer will 
pay about 2-1 / 2 times the list price to borrow money the bank never 
had until the mortgage was signed; and if he fails to pay the full 250 
percent, the bank may wind up with the house. 

For the first five years of a thirty-year home mortgage, most of the 
buyer's monthly payments consist of interest. For ARMs, the loans 
may be structured so that the first five years' payments consist only of 
interest, with a variable-rate loan thereafter. Since most homes change 
hands within five years, the average buyer who thinks he owns his 
own home finds on resale that most if not all of the equity still belongs 
to the lender. If interest rates have gone up in the meantime, home 
values will drop, and the buyer will be locked into higher payments 
for a less valuable house. If he has taken out a home loan for "equity" 
that has subsequently disappeared, he may have to pay the difference 
on sale of the home. And if he can't afford that balloon payment, he 
will be reduced to home serfdom, strapped in a home he can't afford, 
working to make his payments to the bank. William Hope Harvey's 
dire prediction that workers would become wage-slaves who owned 
nothing of their own would have materialized. 

The Homestead Laws that gave settlers their own plot of land have 
been largely eroded by 150 years of the "business cycle," in which 
bankers have periodically raised interest rates and called in loans, cre- 
ating successive waves of defaults and foreclosures. For most fami- 
lies, the days of inheriting the family home free and clear are a thing 
of the past. Some individual homeowners have made out well from 
the housing boom, but the overall effect has been to put the average 
family on the hook for a substantially more expensive mortgage than 
it would have had a decade ago. Again the real winners have been 
the banks. As market commentator Craig Harris explained in a March 
2004 article: 

Essentially what has happened is that there was a sort of stealth 
transfer of net worth from the public to the banks to help save 
the system. The public took on the risk, went further into debt, 
spent a lot of money . . . and the banks' new properties have 
appreciated substantially. . . . They created the money and lent 
it to you, you spent the money to prop up the economy, and 


Web of Debt 

now they own the real property and you're on the hook to pay 
them back an inflated price [for] that property . . . They gave 
you a better rate but you paid more for the property which they 
now own until you pay them back. 7 

The Impending Tsunami of Sub-prime Mortgage Defaults 

The larger a pyramid scheme grows, the greater the 
number of investors who need to be brought in to support the pyramid. 
When the "prime" market was exhausted, lenders had to resort to the 
riskier "sub-prime" market for new borrowers. Risk was off-loaded 
by slicing up these mortgages and selling them to investors as 
"mortgage-backed securities." "Securitizing" mortgages and selling 
them to investors was touted as "spreading the risk," but the device 
backfired. It wound up spreading risk like a contagion, infecting 
investment pools ranging from hedge funds to pension funds to money 
market funds. 

In a November 2005 article called "Surreal Estate on the San 
Andreas Fault," Gary North estimated that loans related to the housing 
market had grown to 80 percent of bank lending, and that much of 
this growth was in the sub-prime market, which had been hooked 
with ARMs that were quite risky not only for the borrowers but for 
the lenders. North said prophetically: 

. . . Even without a recession, the [housing] boom will falter 
because of ARMs .... These time bombs are about to blow, 
contract by contract. 

If nothing changes — if short-term rates do not rise — monthly 
mortgage payments are going to rise by 60% when the readjustment 
kicks in. Yet buyers are marginal, people who could not qualify 
for a 30-year mortgage. This will force "For Sale" signs to flower 
like dandelions in spring. . . . 

If you remember the S&L [savings and loan association] crisis 
of the mid-1980s, you have some indication of what is coming. 
The S&L crisis in Texas put a squeeze on the economy in Texas. 
Banks got nasty. They stopped making new loans. Yet the S&Ls 
were legally not banks. They were a second capital market. 
Today, the banks have become S&Ls. They have tied their loan 
portfolios to the housing market. 

I think a squeeze is coming that will affect the entire banking 
system. The madness of bankers has become unprecedented. . . 


Chapter 30 - The Lure In The Consumer Debt Trap 

Banks will wind up sitting on top of bad loans of all kinds because 
the American economy is now housing-sale driven. 8 

The savings and loan industry collapsed after interest rates were 
raised to unprecedented levels in the 1980s. The commercial banks' 
prime rate (the rate at which they had to borrow) reached 20.5 percent 
at a time when the S&Ls were earning only about 5 percent on 
mortgage loans made previously, and the negative spread caused them 
huge losses. Although banks in recent years have off-loaded mortgages 
by selling them to investors, the banks may still be liable in the event of 
default; and even if they're not, they could find themselves defending 
some very large lawsuits, as we'll see shortly. The banks themselves 
are also heavily invested in securities infected with subprime debt. 

By January 2007, the housing boom had substantially cooled, after 
a series of interest rate hikes were imposed by the Fed. An article in 
The New York Times that month warned,"l in 5 sub-prime loans will 
end in foreclosure .... About 2.2 million borrowers who took out sub- 
prime loans from 1998 to 2006 are likely to lose their homes." In an 
editorial the same month, Mike Whitney noted that when family 
members and other occupants are included, that could mean 10 million 
people turned out into the streets; and some analysts thought even 
that estimate was low. Whitney quoted Peter Schiff, president of an 
investment strategies company, who warned, "The secondary effects 
of the '1 out of 5' sub-prime default rate will be a chain reaction of 
rising interest rates and falling home prices engendering still more 
defaults, with the added foreclosures causing the cycle to repeat. In 
my opinion, when the cycle is fully played out we are more likely to 
see an 80% default rate rather than 20%." Whitney commented: 

40 million Americans headed towards foreclosure? Better pick 
out a comfy spot in the local park to set up the lean-to. Schiff 's 
calculations may be overly pessimistic, but his reasoning is sound. 
Once mortgage-holders realize that their homes are worth tens 
of thousands less than the amount of their loan they are likely to 
"mail in their house keys rather than make the additional 
mortgage payments." As Schiff says, "Why would anyone 
stretch to spend 40% of his monthly income to service a $700,000 
mortgage on a condo valued at $500,000, especially when there 
are plenty of comparable rentals that are far more affordable?" 9 

As with the Crash of 1929, the finger of responsibility is being 
pointed at the Federal Reserve, which blew up the housing bubble 
with "easy" credit, then put a pin in it by making credit much harder 


Web of Debt 

to get. Whitney writes: 

[The Fed] kept the printing presses whirring along at full-tilt 
while the banks and mortgage lenders devised every scam 
imaginable to put greenbacks into the hands of unqualified 
borrowers. ARMs, "interest-only" or "no down payment" loans 
etc. were all part of the creative financing boondoggle which 
kept the economy sputtering along after the "" crackup 
in 2000. 

. . . Now, many of those same buyers are stuck with enormous 
loans that are about to reset at drastically higher rates while 
their homes have already depreciated 10% to 20% in value. This 
phenomenon of being shackled to a "negative equity mortgage" 
is what economist Michael Hudson calls the "New Road to 
Serfdom"; paying off a mortgage that is significantly larger than 
the current value of the house. The sheer magnitude of the 
problem is staggering. 

The ability to adjust interest rates is considered a necessary and 
proper tool of the Fed in managing the money supply, but it is also a 
form of arbitrary manipulation that can be used to benefit one group 
over another. The very notion that we have a "free market" is belied 
by the fact that investors, advisers and market analysts wait with bated 
breath to hear what the Fed is going to do to interest rates from month 
to month. The market is responding not to supply and demand but to 
top-down dictatorial control. Not that that would be so bad if it actu- 
ally worked, but a sinking economy can't be kept afloat merely by 
adjusting interest rates. The problem has been compared to "pushing 
on a string": when credit (or debt) is the only way to keep money in 
an economy, once borrowers are "all borrowed up" and lenders have 
reached their lending limits, no amount of lowering interest rates will 
get more debt-money into the system. Lenders managed to get around 
the lending limits by moving loans off their books and selling them to 
investors, but when the investors learned that the loans were "toxic" 

— infected with risky subprime debt — they quit buying, putting the 
"credit market" (or debt market) at risk of seizing up altogether. The 
only solution to this conundrum is to get "real" money into the system 

— real, interest-free, debt-free, government-issued legal tender of the 
sort first devised by the American colonists. 

By 2005, financial weather forecasters could see two economic 
storm fronts forming on the horizon, and both were being blamed on 
the market manipulations of the Fed .... 


Chapter 31 

Uncle Henry sat upon the doorstep and looked anxiously at the 
sky, which was even grayer than usual. . . . "There's a cyclone coming, 
Em," he called to his wife. . . . Aunt Em dropped her work and came 
to the door. . . . "Quick, Dorothy I" she screamed. "Run for the cellar!" 

- The Wonderful Wizard ofOz, 
"The Cyclone" 

The rare weather phenomenon known as "the perfect storm" 
occurs when two storm fronts collide. What analysts are calling 
"the perfect financial storm" is the impending collision of the two 
economic storm fronts of inflation and deflation. The American money 
supply is being continually pumped up with new money created as 
loans, but borrowers are increasingly unable to repay their loans, which 
are going into default. When loans are extinguished by default, the 
money supply contracts and deflation and depression result. The 
collision of these two forces can result in "stagflation" - price inflation 
without economic growth. That is a "category 1" financial storm. A 
"category 5" storm might result from a derivatives crisis in which major 
traders defaulted on their bets, or from a serious decline in the housing 
market. In a June 2005 newsletter, Al Martin stated that the General 
Accounting Office, the Office of the Comptroller of the Currency, and 
the Federal Housing Administration had privately warned that a 
decline of as much as 40 percent could occur in the housing market 
between 2005 and 2010. A housing decline of that magnitude could 
collapse the economy of the United States. 1 


Chapter 31 - The Perfect Financial Storm 

The Debt Crisis and the Housing Bubble 

After a series of changes beginning in 2001 dropping the federal 
funds rate to unprecedented lows, housing prices began their inexorable 
climb, aided by a loosening of lending standards. Adjustable-rate loans, 
interest only loans, and no down payment loans drew many new home 
buyers into the market, putting steady upward pressure on prices. 
Soaring housing prices, in turn, deepened the debt crisis. To keep all 
this new debt-money afloat required a steady stream of new borrowers, 
prompting lenders to offer loans to shaky borrowers on more and more 
lax conditions. In 2005, a Mortgage Bankers Association survey found 
that high-risk adjustable and interest-only loans had grown to account 
for nearly half of new loan applications. Federal Reserve Governor 
Susan Schmidt Bies, speaking in October 2005, said that average U.S. 
housing prices had appreciated by more than 80 percent since 1997. 

Rock-bottom interest rates salvaged stock market speculators and 
big investment banks from the 2000 recession, and they allowed some 
politically-popular tax cuts that favored big investors; but they were 
disastrous for the bond market, where retired people have traditionally 
invested for a safe and predictable return on their savings. By 2004, 
real returns after inflation on short-term interest rates were negative. 2 
(That is, if you lent $100 to the government by buying its bonds this 
year, your investment might grow to be worth $102 next year; but 
after inflation it would be worth only $98.) The result was to force 
retired people living on investment income out of the reliable bond 
market into the much riskier stock market. Today stocks are owned 
by over half of Americans, the highest number in history. 

The Fed's low-interest policies also discouraged foreign investors 
from buying U.S. bonds, and that is what precipitated the second 
financial storm front. Foreign investment money is relied on by the 
government to roll over its ballooning debt. New bonds must 
continually be sold to investors to replace the old bonds as they come 
due. The Fed has therefore been under pressure to raise interest rates, 
both to attract foreign investors and to keep a lid on inflation. Higher 
interest rates, however, mean that increasing numbers of homes will 
go into foreclosure; and when mortgages are voided out, the supply of 
credit-money they created shrinks with them. Although the sellers 
have been paid and the old loan money is still in the system, the banks 
have to balance their books, which means they can create less money 
in the form of new loans; and borrowers are harder to find, because 


Web of Debt 

higher interest rates are less attractive to them. In the last "normal" 
correction of the housing market, between 1989 and 1991, median 
home prices dropped by 17 percent, and 3.6 million mortgages went 
into default. Analysts estimated, however, that the same decline in 
2005 would have produced 20 million defaults, because the average 
equity-to-debt ratio (the percentage of a home that is actually "owned" 
by the homeowner) had dropped dramatically. The ratio went from 
37 percent in 1990 to a mere 14 percent in 2005, a record low, because 
$3 trillion had been taken out of property equities in the previous four 
years to sustain consumer spending. 3 

What would 20 million defaults do to the money supply? Al Martin 
cites a Federal Reserve study reported by Alan Greenspan before the 
Joint Economic Committee in June 2005, estimating that two trillion 
dollars would simply evaporate along with these uncollectible loans. That 
means two trillion dollars less to spend on government programs, wages 
and salaries. In 2005, two trillion dollars was about one-fifth the total 
M3 money supply. Accompanying that radical contraction, analysts 
predicted that stocks and home values would plummet, income taxes 
would triple, Social Security and Medicare benefits would be slashed 
in half, and pensions and comfortable retirements would become 
things of the past. And that was assuming housing prices dropped by 
only 17 percent. A substantially higher drop was feared, with even 
more dire consequences. 4 

Fannie and Freddie: Compounding the Housing Crisis with 
Derivatives and Mortgage-Backed Securities 

In a June 2002 article titled "Fannie and Freddie Were Lenders," 
Richard Freeman warned that the housing bubble was the largest 
bubble in history, dwarfing anything that had gone before; and that it 
has been pumped up to its gargantuan size by Fannie Mae (the Federal 
National Mortgage Association) and Freddie Mac (the Federal Home 
Mortgage Corporation), twin volcanoes that were about to blow. 
Fannie and Freddie have dramatically expanded the ways money can 
be created by mortgage lending, allowing the banks to issue many 
more loans than would otherwise have been possible; but it all adds 
up to another Ponzi scheme, and it has reached its mathematical limits. 

Focusing on the larger of these two institutional cousins, Fannie 
Mae, Freeman noted that if it were a bank, it would be the third larg- 
est bank in the world; and that it makes enormous amounts of money 


Chapter 31 - The Perfect Financial Storm 

in the real estate market for its private owners. Contrary to popular 
belief, Fannie Mae is not actually a government agency. It began that 
way under Roosevelt's New Deal, but it was later transformed into a 
totally private corporation. It issued stock that was bought by private 
investors, and eventually it was listed on the stock exchange. Like the 
Federal Reserve, it is now "federal" only in name. 

Before the late 1970s, there were two principal forms of mortgage 
lending. The lender could issue a mortgage loan and keep it; or the 
lender could sell the loan to Fannie Mae and use the cash to make a 
second loan, which could also be sold to Fannie Mae, allowing the 
bank to make a third loan, and so on. Freeman gives the example of a 
mortgage-lending financial institution that makes five successive loans 
in this way for $150,000 each, all from an initial investment of 
$150,000. It sells the first four loans to Fannie Mae, which buys them 
with money made from the issuance of its own bonds. The lender 
keeps the fifth loan. At the end of the process, the mortgage-lending 
institution still has only one loan for $150,000 on its books, and Fannie 
Mae has loans totaling $600,000 on its books. 

In 1979-81, however, policy changes were made that would flood 
the housing market with even more new money. Fannie Mae gathered 
its purchased mortgages from different mortgage-lending institutions 
and pooled them together, producing a type of lending vehicle called 
a Mortgage-Backed Security (MBS). Fannie might, for example, bundle 
one thousand 30-year fixed-interest mortgages, each worth roughly 
$100,000, and pool them into a $100 million MBS. It would put a loan 
guarantee on the MBS, for which it would earn a fee, guaranteeing 
that in the event of default it would pay the interest and principal due 
on the loans "fully and in a timely fashion." The MBS would then be 
sold as securities in denominations of $1,000 or more to outside 
investors, including mutual funds, pension funds, and insurance 
companies. The investors would become the owners of the MBS and 
would have a claim on the underlying principal and interest stream of 
the mortgage; but if anything went wrong, Fannie Mae was still 
responsible. The MBS succeeded in extending the sources of funds 
that could be tapped into for mortgage lending far into U.S. and 
international financial markets. It also substantially increased Fannie 
Mae's risk. 

Then Fannie devised a fourth way of extracting money from the 
markets. It took the securities and pooled them again, this time into 
an instrument called a Real Estate Mortgage Investment Conduit or 


Web of Debt 

REMIC (also known as a "restructured MBS" or collateralized mort- 
gage obligation). REMICs are very complex derivatives. Freeman 
wrote, "They are pure bets, sold to institutional investors, and indi- 
viduals, to draw money into the housing bubble." Roughly half of 
Fannie Mae's Mortgage Backed Securities have been transformed into 
these highly speculative REMIC derivative instruments. "Thus," said 
Freeman, "what started out as a simple home mortgage has been 
transmogrified into something one would expect to find at a Las Ve- 
gas gambling casino. Yet the housing bubble now depends on pre- 
cisely these instruments as sources of funds." 

Only the first of these devices is an "asset," something on which 
Fannie Mae can collect a steady stream of principal and interest. The 
others represent very risky obligations. These investment vehicles have 
fed the housing bubble and have fed off it, but at some point, said 
Freeman, a wave of mortgage defaults is inevitable; and when that 
happens, the riskier mortgage-related obligations will amplify the crisis. 
They are particularly risky because they involve leveraging (making 
multiple investments with borrowed money). That means that when 
the bet goes wrong, many losses have to be paid instead of one. 

In 2002, Fannie Mae's bonds made up over $700 billion of its 
outstanding debt total of $764 billion. Only one source of income was 
available to pay the interest and principal on these bonds, the money 
Fannie collected on the mortgages it owned. If a substantial number 
of mortgages were to go into default, Fannie would not have the cash 
to pay its bondholders. Freeman observed that no company in America 
has ever defaulted on as much as $50 billion in bonds, and Fannie Mae has 
over $700 billion - at least ten times more than any other corporation in 
America. A default on a bonded debt of that size, he said, could end 
the U.S. financial system virtually overnight. 

Like those banking institutions considered "too big to fail," Fannie 
Mae has tentacles reaching into so much of the financial system that if 
it goes, it could take the economy down with it. A wave of home 
mortgage defaults would not alone have been enough to bring down 
the whole housing market, said Freeman; but adding the possibility of 
default on Fannie' s riskier obligations, totaling over $2 trillion in 2002, 
the chance of a system-wide default has been raised to "radioactive" 
levels. If a crisis in the housing mortgage market were to produce a 
wave of loan defaults, Fannie would not be able to meet the terms of 
the guarantees it put on $859 billion in Mortgage-Backed Securities, 
and the pension funds and other investors buying the MBS would 


Chapter 31 - The Perfect Financial Storm 

suffer tens of billions of dollars in losses. Fannie's derivative obligations, 
which totaled $533 billion in 2002, could also go into default. These 
hedges are supposed to protect investors from risks, but the hedges 
themselves are very risky ventures. Fannie Mae has taken 
extraordinary measures to roll over shaky mortgages in order to obscure 
the level of default currently threatening the system; but as households 
with declining real standards of living are increasingly unable to pay 
rising home prices and the demands of ever larger mortgages and 
higher interest payments, mortgage defaults will rise. The leverage 
that has been built into the housing market could then unwind like a 
rubber band, rapidly de-leveraging the entire market. 5 

In 2003, Freddie Mac was embroiled in a $5 billion accounting 
scandal, in which it was caught "cooking" the books to make things 
look rosier than they were. In 2004, Fannie Mae was caught in a 
similar scandal. In 2006, Fannie agreed to pay $400 million for its 
misbehavior ($50 million to the U.S. government and $350 million to 
defrauded shareholders), and to try to straighten out its books. But 
investigators said the accounting could be beyond repair, since some 
$16 billion had simply disappeared from the books. 

Meanwhile, after blowing the housing bubble to perilous heights 
with a 1 percent prime rate, the Fed proceeded to let the air back out 
with a succession of interest rate hikes. By 2006, the housing boom 
was losing steam. Nervous investors wondered who would be 
shouldering the risk when the mortgages bundled into MBS slid into 
default. As one colorful blogger put it: 

So let me get this straight .... Is the following scenario below 
actually playing out? 

For starters ma n' pa computer programmer buy a 500K 
house in Ballard using a neg-am/i-o [negative amortization 
interest-only mortgage] sold to them by a dodgy local fly-by night 
lender. That lender immediately sells it off to some middle-man 
for a period of time. The middlemen take their cut and then sell 
that loan upstream to Fannie Mae/ Freddie Mac before it becomes 
totally toxic and reaches critical mass. At which point FM/FM 
bundle that loan into a mortgage backed security and sell it to 
pension funds, foreign banks, etc. etc. 

What happens when those loans go into their inevitable 
default? Who owns the property at that point and is left holding 
the bag? 6 


Web of Debt 

Nobody on the blog seemed to know; but according to Freeman, 
Fannie Mae will be holding the bag, since it guaranteed payment of 
interest and principal in the event of default. When Fannie Mae can't 
pay, the pension funds and other institutions investing in its MBS will 
be left holding the bag; and it is these pension funds that manage the 
investments on which the retirements of American workers depend. When 
that happens, comfortable retirements could indeed be things of the 

What Happens When No One Has Standing to Foreclose? 

In October 2007, a U.S. District Court judge in Ohio threw an- 
other wrench in the works, when he held that Deutsche Bank did not 
have standing to foreclose on 14 mortgage loans it held in trust for a 
pool of MBS holders. Judge Christopher Boyko said that a security 
backed by a mortgage is not the same thing as a mortgage. Securitized 
mortgage debt has become so complex that it's nearly impossible to 
know who owns the underlying properties in a typical mortgage pool; 
and without a legal owner, there is no one to foreclose and therefore 
no actual "security." 7 That could be good news for distressed bor- 
rowers but a major blow to MBS holders. Outstanding securitized 
mortgage debt now comes to $6.5 trillion — or it did before its value 
was put in doubt. What these securities would fetch on the market 
today is hard to say. If large numbers of defaulting homeowners 
were to contest their foreclosures on the ground that the plaintiffs 
lacked standing to sue, $6.5 trillion in MBS could be in jeopardy. The 
MBS holders, in turn, might have a very large class action against the 
banks that designed these misbranded investment vehicles. 8 

The discovery that securities rated "triple- A" may be infected with 
toxic subprime debt has made investors leery of investing and lenders 
leery of lending, and that includes the money market funds relied on 
by banks to balance their books from day to day. The entire credit 
market is at risk of seizing up. 

It is at risk of seizing up for another, more perilous reason .... 


Chapter 32 

In the middle of a cyclone the air is generally still, but the great 
pressure of the wind on every side of the house raised it up higher and 
higher, until it was at the very top of the cyclone; and there it remained 
and was carried miles and miles away. 

- The Wonderful Wizard ofOz, 
"The Cyclone" 

The looming derivatives crisis is another phenomenon 
often described with weather imagery. "The grey clouds are 
getting darker," wrote financial consultant Colt Bagley in 2004; "the 
winds only need to kick up and we'll have one heck of a financial 
cyclone in the making." 1 A decade earlier, Christopher White told 

Taken as a whole, the financial derivatives market, orchestrated 
by financiers, operates with the vortical properties of a powerful 
hurricane. It is so huge and packs such a large momentum, that 
it sucks up the overwhelming majority of the capital and cash 
that enters or already exists in the economy. It makes a mockery 
of the idea that a nation exercises sovereign control over its credit 
policy. 1 

Martin Weiss, writing in a November 2006 investment newsletter, 
called the derivatives crisis "a global Vesuvius that could erupt at 
almost any time, instantly throwing the world's financial markets into 
turmoil . . . bankrupting major banks . . . sinking big-name insurance 
companies . . . scrambling the investments of hedge funds . . . 
overturning the portfolios of millions of average investors." 3 


Chapter 32 - In the Eye of the Cyclone 

John Hoefle's arresting image was of fleas on a dog. "The fleas 
have killed the dog," he said, "and thus they have killed themselves." 4 
Colt Bagley also sees in the derivatives crisis the seeds of the banks' 
own destruction. He wrote in 2004: 

Once upon a time, the American banking system extended loans 
to productive agriculture and industry. Now, it is a vast betting 
machine, gaming on market distortions of interest rates, stocks, 
currencies, etc. . . . JP Morgan Chase Bank (JPMC) dominates the 
U.S. derivatives market . . . JPMC Bank alone has derivatives 
approaching four times the U.S. Gross Domestic Product of $11.5 
trillion. Next come Bank of America and Citibank, with $14.9 
trillion and $14.4 trillion in derivatives, respectively. The OCC 
[Office of the Comptroller of the Currency] reports that the top 
seven American derivatives banks hold 96% of the U.S. banking 
system's notional derivatives holding. If these banks suffer serious 
impairment of their derivatives holdings, kiss the banking system 

Martin Weiss envisions how this collapse might occur: 

Portfolio managers at a major hedge fund bet too much on 
declining interest rates and they lose. They don't have enough 
capital to pay up on the bet, and the counterparties in the 
transaction - the winners of the bet - can't collect. Result: Many 
of these winners, also low on capital, can't pay up on their own 
bets and debts in a series of other derivatives transactions. 
Suddenly, in a chain reaction that no government or exchange 
authority can halt, dozens of major transactions slip into default, 
each setting off dozens of additional defaults. 

Major U.S. banks you've trusted with your hard-earned 
savings lose billions. Their shares plunge. Their uninsured CDs 
are jeopardized. 

Mortgage lenders dramatically tighten their lending 
standards. Mortgage money virtually disappears. The U.S. 
housing market, already sinking, busts wide open. 5 

Derivatives 101 

Gary Novak, whose website simplifying complex issues was quoted 
earlier, explains that the banking system has become gridlocked 
because its pretended "derivative" assets are fake; and the fake assets 
have swallowed up the real assets. It all began with deregulation in 


Web of Debt 

the 1980s, when government regulation was considered an irrational 
scheme from which business had to be freed. But regulations are 
criminal codes, and eliminating them meant turning business over to 
thieves. The Enron and Worldcom defendants were able to argue in 
court that their procedures were legal, because the laws making them 
illegal had been wiped off the books. Government regulation prevented 
the creation of "funny money" without real value. When the 
regulations were eliminated, funny money became the order of the 
day. It manifested in a variety of very complex vehicles lumped 
together under the label of derivatives, which were often made 
intentionally obscure and confusing. 

"Physicists were hired to write equations for derivatives which 
business administrators could not understand," Novak says. 
Derivatives are just bets, but they have been sold as if they were 
something of value, until the sales have reached astronomical sums 
that are far beyond anything of real value in existence. Pension funds 
and trust funds have bought into the Ponzi scheme, only to see their 
money disappear down the derivatives hole. Universities have been 
forced to charge huge tuitions although they are financed with huge 
trust funds, because their money has been tied up in investments that 
are basically worthless. But the administrators are holding onto their 
bets, which are "given a pretended value, because heads roll when 
the truth comes to light." Nobody dares to sell and nobody can collect. 
The result is a shortage of available funds in global financial institutions. 
The very thing derivatives were designed to create - market liquidity - 
has been frozen to immobility in a gridlocked game. 6 

The author of a blog called "World Vision Portal" simplifies the 
derivatives problem in another way. He writes: 

Anyone who has been to Las Vegas or at the casino on a 
cruise ship can understand it perfectly. A bank gambles and 
bets on certain pre-determined odds, like playing the casino dealer 
in a game of poker (banks call this "hedging their risks with de- 
rivative contracts"). When they have to show their cards at the 
end of the play, they either win or lose their bet; either the bank 
wins or the house wins (this is the end of the derivative contract 

For us small-time players, we might lose $10 or $20, but the 
big-time banks are betting hundreds of millions on each card 
hand. The worst part is that they have a gambling addiction 
and can't stop betting money that isn't theirs to bet with. . . . 


Chapter 32 - In the Eye of the Cyclone 

Winners always leave the gambling table with a big smile 
and you can see the chips in their hand to know they won more 
than they had bet. But losers always walk away quietly and 
don't talk about how much they lost. If a bank makes a good 
profit (won their bet), they would be telling everyone that their 
derivative contracts have paid off and they're sitting pretty. In 
reality, the big-time gambling banks are not talking and won't 
tell anyone how much they gambled or how much they lost. 

We've been hoodwinked and the game is pretty much over. 7 

The irony is that derivative bets are sold as a form of insurance 
against something catastrophic going wrong. But if something cata- 
strophic does go wrong, the counterparties (the parties on the other 
side of the bet, typically hedge funds) are liable to fold their cards and 
drop out of the game. The "insured" are left with losses both from the 
disaster itself and from the loss of the premium paid for the bet. To 
avoid that result, the Federal Reserve, along with other central banks, 
a fraternity of big private banks, and the U.S. Treasury itself, have 
gotten into the habit of covertly bailing out losing counterparties. This 
was done when the giant hedge fund Long Term Capital Manage- 
ment went bankrupt in 1998. It was also evidently done in 2005, but 
very quietly .... 

A Derivatives Crisis Orders of Magnitude 
Beyond LTCM? 

Rumors of a derivatives crisis dwarfing even the LTCM debacle 
surfaced in May 2005, following the downgrading of the debts of Gen- 
eral Motors and Ford Motor Corporation to "junk" (bonds having a 
credit rating below investment grade). Severe problems had appar- 
ently occurred at several large hedge funds directly linked to these 
downgradings. In an article in Executive Intelligence Review in May 
2005, Lothar Komp wrote: 

The stocks of the same large banks that participated in the 1998 
LTCM bailout, and which are known for their giant derivatives 
portfolios - including Citigroup, JP Morgan Chase, Goldman 
Sachs, and Deutsche Bank - were hit by panic selling on May 
10. Behind this panic was the knowledge that not only have 
these banks engaged in dangerous derivatives speculation on 
their own accounts, but, ever desperate for cash to cover their 


Web of Debt 

own deteriorating positions, they also turned to the even more 
speculative hedge funds, placing money with existing funds, or 
even setting up their own, to engage in activities they didn't 
care to put on their own books. The combination of financial 
desperation, the Fed's liquidity binge, and the usury-limiting 
effects of low interest rates, triggered an explosion in the number 
of hedge funds in recent years, as everyone chased higher, and 
riskier, returns. There can be no doubt that some of these banks, 
not only their hedge fund offspring, are in trouble right now. 8 

Dire warnings ensued of a derivatives crisis "orders of magnitude 
beyond LTCM." But reports of a major derivative blow-out were be- 
ing publicly denied, says Komp, since any bank or hedge fund that 
admitted such losses without first working a bail-out scheme would 
instantly collapse. An insider in the international banking commu- 
nity said that "there is no doubt that the Fed and other central banks 
are pouring liquidity into the system, covertly. This would not become 
public until early April [2006], at which point the Fed and other central 
banks will have to report on the money supply." 9 

We've seen that when the Fed "pours liquidity into the system," it 
does it by "open market operations" that create money with account- 
ing entries and lend this money into the money supply, "monetizing" 
government debt. If it became widely known that the Fed were print- 
ing dollars wholesale, however, alarm bells would sound. Investors 
would rush to cash in their dollar holdings, crashing the dollar and 
the stock market, following the familiar pattern seen in Third World 
countries. 10 What to do? The Fed apparently chose to muffle the alarm 
bells. It announced that in March 2006, it would no longer be report- 
ing M3. M3 has been the main staple of money supply measurement 
and transparent disclosure for the last half -century, the figure on which 
the world has relied in determining the soundness of the dollar. In a 
December 2005 article called "The Grand Illusion," financial analyst 
Rob Kirby wrote: 

On March 23, 2006, the Board of Governors of the Federal Reserve 
System will cease publication of the M3 monetary aggregate. 
The Board will also cease publishing the following components: 
large-denomination time deposits, repurchase agreements (RPs), 
and Eurodollars. . . . [These securities] are exactly where one 
would expect to find the "capture" of any large scale 
monetization effort that the Fed would embark upon - should 
the need occur. 


Chapter 32 - In the Eye of the Cyclone 

A commentator going by the name of Captain Hook observed: 

[T]his is as big a deal as Nixon closing the "gold window" back 
in '71, and we all know what happened after that. . . . [I]t almost 
looks like the boys are getting ready to unleash Weimar Republic 
II on the world. . . . Can you say welcome to the "People's 
Republic of the United States of What Used to Be America"?. . . 
[W]e just got another very "big signal" from U.S. monetary authorities 
that the rules of the game are about to change fundamentally, once 
again. 11 

When Nixon closed the gold window internationally in 1971 and 
when Roosevelt did it domestically before that, the rules were changed 
to keep a bankrupt private banking system afloat. The change in the 
Fed's reporting habits in 2006 appears to have been designed for the 
same purpose. The Fed was soon rumored to be madly printing up $2 
trillion in new Federal Reserve Notes. 12 Why? Some analysts pointed 
to the festering derivatives crisis, while others said it was the housing 
crisis; but there were also rumors of a third cyclone on the horizon. 
Iran announced that it would be opening an oil market (or "bourse") 
in Euros in March 2006, sidestepping the 1974 agreement with OPEC 
to trade oil only in U.S. dollars. An article in the Arab online maga- 
zine Al-Tazeerah warned that the Iranian bourse "could lead to a col- 
lapse in value for the American currency, potentially putting the U.S. 
economy in its greatest crisis since the depression era of the 1930s." 13 
Rob Kirby wrote: 

[I]f countries like Japan and China (and other Asian countries) 
with their trillions of U.S. dollars no longer need them (or require 
a great deal less of them) to buy oil . . . [and] begin wholesale 
liquidation of U.S. debt obligations, there is no doubt in my mind 
that the Fed will print the dollars necessary to redeem them - 
this would necessarily imply an absolutely enormous (can you 
say hyperinflation) bloating of the money supply - which would 
undoubtedly be captured statistically in M3 or its related 
reporting. It would appear that we're all going to be "flying 
blind" as to how much money the Fed is truly going to pump 
into the system . . . , 14 

For the Federal Reserve to "monetize" the government's debt with 
newly-issued dollars is actually nothing new. When no one else buys 
U.S. securities, the Fed routinely steps in and buys them with money 
created for the occasion. What is new, and what has analysts alarmed, 
is that the whole process is now occurring behind a heavy curtain of 


Web of Debt 

Total M3 Money Stock at Calendar Year End 
1901 (10 billion) - 2-5 (10 trillion) and Part Year 2006 

■ Jul J 

i inr i 



3 60M 



-,- i.n.MlMlfllfllf 

■^ff Cft- Oi ^fc Oi ^fr Sfi L'-. 1 m U'J ^ft- 

secrecy. Richard Daughty, an entertaining commentator who writes 
in The Daily Reckoning as the Mogambu Guru, commented in April 

There was ... a flurry of excitement last week when there 
was a rumor that the Federal Reserve had printed up, suddenly, 
$2 trillion in cash. My initial reaction was, of course, 
"Hahahaha!" and my reasoning is thus: why would they go 
through the hassle? They can make electronic money with the 
wave of a finger, so why go through the messy rigamarole of 
dealing with ink and paper and all the problems of transporting 
it and counting it and storing it and blah blah blah? 

But . . . this whole "two trillion in cash" scenario has some, 
um, merit, especially if you are thinking that foreigners dumping 
American securities . . . would instantly be reflected in 
instantaneous losses in bonds and meteoric rises in interest rates 
and the entire global economic machine would melt down. 

So maybe this could explain the "two trill in cash" plan: 
With this amount of cash, see, the American government can pretty 
much buy all the government securities that any foreigners want to 
sell, but the inflationary effects of creating so much money won't 
be felt in prices for awhile! Hahaha! They think this is clever! 15 


Chapter 32 - In the Eye of the Cyclone 

It might be clever, if it really were the American government buying 
back its own securities; but it isn't. It is the private Federal Reserve and 
private banks. If dollars are to be printed wholesale and federal securities 
are to be redeemed with them, why not let Congress do the job itself 
and avoid a massive unnecessary debt to financial middlemen? 
Arguably, as we'll see later, if the government were to buy back its 
own bonds and take them out of circulation, it could not only escape 
a massive federal debt but could do this without producing inflation. 
Government securities are already traded around the world just as if 
they were money. They would just be turned into cash, leaving the 
overall money supply unchanged. When the Federal Reserve buys up 
government bonds with newly-issued money, on the other hand, the 
bonds aren't taken out of circulation. Instead, they become the basis 
for generating many times their value in new loans; and that result is 
highly inflationary. But that is getting ahead of our story .... 

The Orwellian Solution 

The Fed had succeeded in hiding its sleight of hand by concealing 
the numbers for M3, but inflation was obviously occurring. By the 
spring of 2006, oil, gold, silver and other commodities were skyrocket- 
ing. Then, mysteriously, these inflation indicators too got suppressed. 
In the British journal Financial News Online in October 2006, Barry 
Riley wryly observed: 

Until the summer, the trends appeared ominous. The Fed 
was raising short rates and inflation was climbing. The price of 
crude oil stopped short of $80 a barrel. Sales of new homes 
were dropping off a cliff. Then, as if by magic, everything 
changed. The oil price went into reverse, tumbling to under $60 
with favourable implications for the Consumer Price Index 
measure of inflation .... Similarly, the gold bullion price - an 
indicator of the potential fragility of the dollar exchange rate - 
has crashed from its early summer high. The Dow Jones Average 
two weeks ago advanced to a high, at last beating the bubble 
top in January 2000. 

. . . [T]he pattern is curious. . . . Perhaps bonds and 
commodities have been anticipating a recession. But then why 
has the equity market climbed? 

Conspiracy theories have abounded since Hank Paulson, boss 
of Goldman Sachs, was nominated in May to become treasury 


Web of Debt 

secretary. He had no political qualifications but a powerful 
reputation as a market fixer. Was he brought in to shore up the 
financial and commodities markets ahead of [the November 2006 

The suspicion arose that the Fed and its banking partners were 
hiding bad economic news in another way — by actually manipulating 
markets. Catherine Austin Fitts, former assistant secretary of HUD, 
called it "the Orwellian scenario." In a 2004 interview, she darkly 

[W]e've reached a point . . . where rather than let financial assets 
adjust, the powers that be now have [such] control of the 
economy through the banking system and through the 
governmental apparatus [that] they can simply steal more money 
. . . , whether it's [by keeping] the stock market pumped up, the 
derivatives going, or the gold price manipulated down. ... In 
other words, you can adjust to your economy not by letting the 
value of the stock market or financial assets fall, but you can use 
warfare and organized crime to liquidate and steal whatever it 
is you need to keep the game going. And that's the kind of 
Orwellian scenario whereby you can basically keep this thing 
going, but in a way that leads to a highly totalitarian government 
and economy - corporate feudalism. 16 

Latter-day Paul Reveres warned that domestic security measures 
were being tightened and civil rights were being stripped. These 
developments mirrored IMF policies in Third World countries, where 
the "IMF riot" was actually anticipated and factored in when "austerity 
measures" were imposed. 17 Conspiracy theorists pointed to efforts to 
get the Constitution suspended under the Emergency Powers Act, 
martial law imposed under the Patriot and Homeland Security Acts, 
and the American democratic form of government replaced with a 
police state. 18 They noted the use of the military in 2005 to quell rioting 
in New Orleans following Hurricane Katrina, in violation of posse 
comitatus, a statute forbidding U.S. active military participation in 
domestic law enforcement. 19 They observed that fully-armed private 
mercenaries, some of them foreign, even appeared on the streets. The 
scene recalled a statement made by former U.S. Secretary of State Henry 
Kissinger at a 1992 conference of the secretive Bilderbergers, covertly 
taped by a Swiss delegate in 1992. Kissinger reportedly said: 


Chapter 32 - In the Eye of the Cyclone 

Today, America would be outraged if U.N. troops entered Los 
Angeles to restore order. Tomorrow they will be grateful! . . . 
The one thing every man fears is the unknown. When presented 
with this scenario, individual rights will be willingly relinquished 
for the guarantee of their well-being granted to them by the 
World Government. 20 

Suspicions were voiced concerning the Federal Emergency 
Management Agency (FEMA), which was in charge of disaster relief. 
In a November 2005 newsletter, Al Martin wrote: 

FEMA is being upgraded as a federal agency, and upon passage 
of PATRIOT Act III, which contains the amendment to overturn 
posse comitatus, FEMA will be re-militarized, which will give the 
agency military police powers. . . . Why is all of this being done? 
Why is the regime moving to a militarized police state and to a 
dictatorship? It is because of what Comptroller General David Walker 
said, that after 2009, the ability of the United States to continue to 
service its debt becomes questionable. Although the average citizen 
may not understand what that means, when the United States 
can no longer service its debt it collapses as an economic entity. 
We would be an economically collapsed state. The only way 
government can function and can maintain control in an economically 
collapsed state is through a military dictatorship. 21 

The Parasite's Challenge: 
How to Feed on the Host Without Destroying It 

Critics charge that warfare, terrorism, and natural disasters on an 
unprecedented scale are being used to justify massive federal 
borrowing, while diverting attention from the fact that the economy 
is drowning in a sea of governmental and consumer debt. 22 And that 
may be true; but policymakers are only doing what they have to do 
under the current monetary scheme. In an upside-down world in 
which debt is money and money is debt, somebody has to go into debt 
just to keep money in the system so the economy won't collapse. The 
old productive virtues - hard work, productivity and creativity - have 
gone out the window. The new producers of economic "growth" are 
borrowers and speculators. Henry C K Liu draws an analogy from 

[Wjhenever credit is issued, money is created. The issuing of 
credit creates debt on the part of the counterparty, but debt is 


Web of Debt 

not money; credit is. If anything, debt is negative money, a form 
of financial antimatter. Physicists understand the relationship 
between matter and antimatter. . . . The collision of matter and 
antimatter produces annihilation that returns matter and 
antimatter to pure energy. The same is true with credit and 
debt, which are related but opposite. . . . The collision of credit 
and debt will produce an annihilation and return the resultant 
union to pure financial energy unharnessed for human benefit. 23 

Credit and debt cancel each other out and merge back into the 
great zero-point field from whence they came. To avoid that result 
and keep "money" in the economy, new debt must continually be 
created. When commercial borrowers aren't creating enough money 
by borrowing it into existence, the government must take over that 
function by spending money it doesn't have, justifying its loans in any 
way it can. Keeping the economy alive means continually finding 
ways to pump newly-created loan money into the system, while 
concealing the fact that this "money" has been spun out of thin air. 
These new loans don't necessarily have to be paid back. New money 
just has to be circulated, providing a source of funds to pay the extra 
interest that wasn't lent into existence by the original loans. A variety 
of alternatives for pumping liquidity into the system have been resorted 
to by governments and central banks, including: 

1. Drastically lowering interest rates, encouraging borrowers to 
expand the money supply by going further and further into debt. 

2. Instituting tax cuts and rebates that put money into people's 
pockets. The resulting budget shortfall is made up later with new 
issues of U.S. bonds, which are "bought" by the Federal Reserve 
with dollars printed up for the occasion. 

3. Authorizing public works, space exploration, military research, 
and other projects that will justify massive government borrowing 
that never gets paid back. 

4. Engaging in war as a pretext for borrowing, preferably a war that 
will drag on. People are willing in times of emergency to allow the 
government to engage heavily in deficit spending to defend the 

5. Lending to Third World countries. If necessary, some of these 
impossible-to-repay loans can be quietly forgiven later without 


Chapter 32 - In the Eye of the Cyclone 

6 . Periodic foreclosures on the loan collateral, transferring the collateral 
back to the banks, which can then be resold to new borrowers, 
creating new debt-money. The result is the "business cycle" - 
periodic waves of depression that flush away debt with massive 
defaults and foreclosures, causing the progressive transfer of wealth 
from debtors to the banks. 

7. Manipulation (or "rigging") of financial markets, including the 
stock market, in order to keep investor confidence high and 
encourage further borrowing, until savings are heavily invested 
and real estate is heavily mortgaged, when the default phase of 
the business cycle can begin again. 24 

Rigging the stock market? At one time, writes New York Post 
columnist John Crudele, just mentioning that possibility got a person 
branded as a "conspiracy nut": 

This country, the critics would say, never interferes with its free 
capital markets. Sure, there's intervention in the currencies 
markets. And, yes, the Federal Reserve does manipulate the 
bond market and interest rates through word and deed. But 
never, ever would such action be taken at the core of capitalism 
- the equity markets, which for better or worse must operate 
without interference. That's the way the standoff stayed until 
1997 when - at the height of the Last of the Great Bubbles - 
someone in government decided it wanted the world to know 
that there was someone actually paying attention in case Wall 
Street could not handle its own problems. The Working Group 
on Financial Markets - affectionately known as the Plunge 
Protection Team - suddenly came out of the closet. 25 


Chapter 33 

The Dow is a dead banana republic dictator in full military uniform 
propped up in the castle window with a mechanical lever moving the 
cadaver's arm, waving to the Wall Street crowd. 

- Michael Bolser, Midas (April 2004) 1 

While people, businesses and local and federal governments 
are barreling toward bankruptcy, market bulls continue to 
insist that all is well; and for evidence, they point to the robust stock 
market. It's uncanny really. Even when there is every reason to think 
the market is about to crash, somehow it doesn't. Bill Murphy, editor 
of an informative investment website called Le Metropole Cafe, 
described this phenomenon in an October 2005 newsletter using an 
analogy from The Wizard of Oz : 

Every time it looks like the stock market is on the verge of collapse, 
it comes back with a vengeance. In May for example, there 
were rumors of derivative problems and hedge fund problems, 
which set up the monster rally into the summer. The London 
bombings . . . same deal. Now we just saw Katrina and Rita 
precipitate rallies. There must be some mechanism at work, like the 
Wizard of Oz behind a curtain, pulling on strings and pushing 
buttons. 2 

What sort of mechanism? John Crudele writes that the cat was let 
out of the bag by George Stephanopoulos, President Clinton's senior 
adviser on policy and strategy, in the chaos following the World Trade 
Center attacks. Stepanopoulos blurted out on "Good Morning 
America" on September 17, 2001: 


Chapter 33 - Maintaining the Illusion 

"[T]he Fed in 1989 created what is called the Plunge Protection 
Team, which is the Federal Reserve, big major banks, 
representatives of the New York Stock Exchange and the other 
exchanges, and there - they have been meeting informally so 
far, and they have kind of an informal agreement among major banks 
to come in and start to buy stock if there appears to be a problem. 

"They have, in the past, acted more formally. 

"I don't know if you remember, but in 1998, there was a crisis 
called the Long Term Capital crisis. It was a major currency 
trader and there was a global currency crisis. And they, at the 
guidance of the Fed, all of the banks got together when that started 
to collapse and propped up the currency markets. And they have 
plans in place to consider that if the stock markets start to fall." 3 

The Plunge Protection Team (PPT) is formally called the Working 
Group on Financial Markets (WGFM). Created by President Reagan's 
Executive Order 12631 in 1988 in response to the October 1987 stock 
market crash, the WGFM includes the President, the Secretary of the 
Treasury, the Chairman of the Federal Reserve, the Chairman of the 
Securities and Exchange Commission, and the Chairman of the Com- 
modity Futures Trading Commission. Its stated purpose is to enhance 
"the integrity, efficiency, orderliness, and competitiveness of our 
Nation's financial markets and [maintain] investor confidence." Ac- 
cording to the Order: 

To the extent permitted by law and subject to the availability of 
funds therefore, the Department of the Treasury shall provide 
the Working Group with such administrative and support 
services as may be necessary for the performance of its functions. 4 

In plain English, taxpayer money is being used to make the mar- 
kets look healthier than they are. Treasury funds are made available, 
but the WGFM is not accountable to Congress and can act from be- 
hind closed doors. It not only can but it must, since if investors were 
to realize what was going on, they would not fall for the bait. "Main- 
taining investor confidence" means keeping investors in the dark about 
how shaky the market really is. 

Crudele tracked the shady history of the PPT in his June 2006 New 
York Post series: 

Back during a stock market crisis in 1989, a guy named Robert 
Heller - who had just left the Federal Reserve Board - suggested 
that the government rig the stock market in times of dire 
emergency. . . . He didn't use the word "rig" but that's what he 


Web of Debt 

Proposed as an op-ed in the Wall Street Journal, it's a seminal 
argument that says when a crisis occurs on Wall Street "instead 
of flooding the entire economy with liquidity, and thereby 
increasing the danger of inflation, the Fed could support the 
stock market directly by buying market averages in the futures 
market, thus stabilizing the market as a whole." 

The stock market was to be the Roman circus of the twenty-first 
century, distracting the masses with pretensions of prosperity. In- 
stead of fixing the problem in the economy, the PPT would just "fix" 
the investment casino. Crudele wrote: 

Over the next few years . . . whenever the stock market was in 
trouble someone seemed to ride to the rescue. . . . Often it 
appeared to be Goldman Sachs, which just happens to be where 
[newly-appointed Treasury Secretary] Paulson and former 
Clinton Treasury Secretary Robert Rubin worked. 

For obvious reasons, the mechanism by which the PPT has ridden 
to the rescue isn't detailed on the Fed's website; but some analysts 
think they know. Michael Bolser, who belongs to an antitrust group 
called GATA (the Gold Anti-Trust Action Committee), says that PPT 
money is funneled through the Fed's "primary dealers," a group of 
favored Wall Street brokerage firms and investment banks. The de- 
vice used is a form of loan called a "repurchase agreement" or "repo," 
which is a contract for the sale and future repurchase of Treasury 
securities. Bolser explains: 

It may sound odd, but the Fed occasionally gives money 
["permanent" repos] to its primary dealers (a list of about thirty 
financial houses, Merrill Lynch, Morgan Stanley, etc). They never 
have to pay this free money back; thus the primary dealers will 
pretty much do whatever the Fed asks if they want to stay in the 
primary dealers "club." 

The exact mechanism of repo use to support the DOW is 
simple. The primary dealers get repos in the morning issuance 
. . . and then buy DOW index futures (a market that is far smaller 
than the open DOW trading volume). These futures prices then 
drive the DOW itself because the larger population of investors 
think the "insider" futures buyers have access to special 
information and are "ahead" of the market. Of course they 
don't have special information . . . only special money in the form 
of repos. 5 


Chapter 33 - Maintaining the Illusion 

The money used to manipulate the market is "Monopoly" money, 
funds created from nothing and given for nothing, just to prop up the 
market. Not only is the Dow propped up but the gold market is held 
down, since gold is considered a key indicator of inflation. If the gold 
price were to soar, the Fed would have to increase interest rates to 
tighten the money supply, collapsing the housing bubble and forcing 
the government to raise inflation-adjusted payments for Social Security. 
Most traders who see this manipulation going on don't complain, 
because they think the Fed is rigging the market to their advantage. 
But gold investors have routinely been fleeced; and the PPT's secret 
manipulations have created a stock market bubble that will take 
everyone's savings down when it bursts, as bubbles invariably do. 
Unwary investors are being induced to place risky bets on a nag on its 
last legs. The people become complacent and accept bad leadership, 
bad policies and bad laws, because they think it is all "working" 

GATA's findings were largely ignored until they were confirmed 
in a carefully researched report released by John Embry of Sprott As- 
set Management of Toronto in August 2004. 6 An update of the report 
published in The Asia Times in 2005 included an introductory com- 
ment that warned, "the secrecy and growing involvement of private- 
sector actors threatens to foster enormous moral hazards." Moral hazard 
is the risk that the existence of a contract will change the way the 
parties act in the future; for example, a firm insured for fire may take 
fewer fire precautions. In this case, the hazard is that banks are tak- 
ing undue investment and lending risks, believing they will be bailed 
out from their folly because they always have been in the past. The 
comment continued: 

Major financial institutions may be acting as de facto agencies of the 
state, and thus not competing on a level playing field. There are 
signs that repeated intervention in recent years has corrupted the 
system. 7 

In a June 2006 article titled "Plunge Protection or Enormous Hid- 
den Tax Revenues," Chuck Augustin was more blunt, writing: 

. . . Today the markets are, without doubt, manipulated on 
a daily basis by the PPT. Government controlled "front 
companies" such as Goldman-Sachs, JP Morgan and many others 
collect incredible revenues through market manipulation. Much 
of this money is probably returned to government coffers, 


Web of Debt 

however, enormous sums of money are undoubtedly skimmed 
by participating companies and individuals. 

The operation is similar to the Mafia-controlled gambling 
operations in Las Vegas during the 50' s and 60' s but much more 
effective and beneficial to all involved. Unlike the Mafia, the 
PPT has enormous advantages. The operation is immune to 
investigation or prosecution, there [are] unlimited funds available 
through the Treasury and Federal Reserve, it has the ultimate 
insider trading advantages, and it fully incorporates the spin 
and disinformation of government controlled media to sway 
markets in the desired direction. . . . Any investor can imagine 
the riches they could obtain if they knew what direction stocks, 
commodities and currencies would move in a single day, 
especially if they could obtain unlimited funds with which to 
invest! . . . [T]he PPT not only cheats investors out of trillions of 
dollars, it also eliminates competition that refuses to be "bought" 
through mergers. Very soon now, only global companies and 
corporations owned and controlled by the NWO elite will exist. 8 

The Exchange Stabilization Fund 

Another regulatory mechanism that is as important — and as sus- 
pect — as the PPT is the "Exchange Stabilization Fund" (ESF). The 
ESF was authorized by Congress to keep sharp swings in the dollar's 
exchange rate from "upsetting" financial markets. Market analyst 
Jim Sinclair writes: 

Don't think of the ESF as an investment type, or even as a hedge 
fund. The ESF has no office, traders, or trading desk. It does 
not exist at all, aside from a fund of money and accounts to keep 
records. It seems that orders come from the US Secretary of the 
Treasury, or his designate (which could be a partner of one of 
the international investment banks he comes from), to intervene 
in markets .... Have you ever wondered how these firms seem 
to be trading for their own accounts on the side of the 
government's interest? Have you wondered how these firms 
always seem to be profitable in their trading accounts, and how 
they wield such enormous positions? . . . Not only [are they] 
executing ESF orders, but in all probability, [they are] coat-tailing 
trades while pretending there is a Chinese Wall between ESF 
orders and their own trading accounts. 9 


Chapter 33 - Maintaining the Illusion 

This is all highly annoying to investors trying to place their bets 
based on what the market "should" be doing, particularly when they 
are competing with a bottomless source of accounting-entry funds. A 
research firm reporting on the unexpectedly high quarterly profits of 
Goldman Sachs in March 2004 wrote cynically: 

[W]ho does Goldman have to thank for the latest outsized 
quarterly earnings? Its "partner" in charge of financing the 
proprietary trading operation — Alan Greenspan. 10 

Henry Paulson headed Goldman Sachs before he succeeded to U.S. 
Treasury Secretary in June 2006, following in the steps of Robert Rubin, 
who headed that investment bank before he was appointed Treasury 
Secretary just in time for Goldman and other investment banks to 
capitalize on the drastic devaluation of the Mexican peso in 1995. An 
October 2006 article in the conservative American Spectator 
complained that the U.S. Treasury was being turned into "Goldman 
Sachs South." 11 

Collusion Between Big Business 
and Big Government: The CRMPG 

Another organization suspected of colluding to rig markets is a 
private fraternity of big New York banks and investment houses called 
the Counterparty Risk Management Policy Group (CRMPG). 
"Counterparties" are parties to a contract, normally having a conflict 
of interest. The CRMPG' s dealings were exposed in an article reprinted 
on the GATA website in September 2006, which was supported by 
references to the websites of the Federal Reserve and the CRMPG. 12 
The author, who went by the name of Joe Stocks, maintained that the 
CRMPG was set up to bail out its members from financial difficulty by 
combining forces to manipulate markets, and that it was all being 
done with the approval of the U.S. government. 

Bailouts, notes Stocks, have been around for a long time. A series 
of them occurred in the 1990s, beginning with the Mexican bailout 
finalized on the evening Robert Rubin was sworn in as U.S. Treasury 
Secretary. This was followed by the 1998 "Asian crisis" and then by 
the 1999 bailout of Long Term Capital Management (LTCM), a giant 
hedge fund dealing in derivatives. The CRMPG was formed in 1999 
to handle the LTCM crisis and to develop a policy that would protect 
the financial world from another such threat in the future. 


Web of Debt 

In May 2002, the SEC expressed concern that a certain major bank 
could become insolvent due to derivative issues. The problem bank 
was JP Morgan Chase (JPM). By the end of the year, the CRMPG had 
recommended that a new bank be founded that would be a coordi- 
nated effort among the members of the CRMPG. The Federal Reserve 
and the SEC approved, and JPM's problems suddenly disappeared. 
A "stealth bailout" had been engineered. 

The same year saw a big jump in the use of "program trades" - 
large-scale, computer-assisted trading of stocks and other securities, 
using systems in which decisions to buy and sell are triggered auto- 
matically by fluctuations in price. The major program traders were 
members of the CRMPG. Members that had not had large propri- 
etary trading units started them, including Citigroup, which was 
quoted as saying something to the effect that there was now less risk 
in trading due to "new" innovations in the field. (New innovations in 
what - market rigging?) In early 2002, program trading was running 
at about 25 percent of all shares traded on the New York Stock Ex- 
change. By 2006, it was closer to 60 percent. About a year later, 
concerns were expressed in The Wall Street Tournal that JPM was 
making huge profits in the risky business of trading its own capital: 

Profits have been increasing recently due to a small and low 
profile group of traders making big bets with the firm's money. 
Apparently, an eight man New York team has pulled in more 
than $100M of trading profit with the company . . . 

In 2004, Fed Chairman Alan Greenspan renewed concerns about 
the exploding derivatives market, which had roughly doubled in size 
since 2000. He called on the major players to meet with the Fed to 
discuss their derivative exposure, and to submit a report on the actions 
it felt were necessary to keep the markets stable. The report, filed in 
July 2005, was addressed not to the head of the Fed but to the chairman 
of Goldman Sachs. It was written in obscure banker jargon that is not 
easy to follow, but you don't need to understand the details to get the 
sense that the nation's largest banks are colluding with their clients 
and with each other to manipulate markets. The document is all about 
working together for the greater good, but Stocks notes that this is not 
how free markets work. The antitrust laws are all about preventing 
this sort of collusion. 

The report says, "we must preserve and strengthen the institutional 
arrangements whereby, at the point of crisis, industry groups and 
industry leaders, as well as supervisors, are prepared to work together 


Chapter 33 - Maintaining the Illusion 

in order to serve the larger and shared goal of financial stability." It 

It is acceptable market practice for a financial intermediary's 
sales and trading personnel to provide their sophisticated 
counterparties with general market levels or "indications," 
including inputs and variables that may be used by the 
counterparty to calculate a value for a complex transaction. 
Additionally, if a counterparty requests a price or level for 
purposes of unwinding a specific complex transaction, and the 
financial intermediary is willing to provide such price or level, it 
is appropriate for the financial intermediary's sales and trading 
personnel to furnish this information. 14 

Stocks writes, "the big banks are being encouraged to share infor- 
mation. We know there are two sides to each trade. . . . How would 
you like to be on the other side of [one of their] pre-arranged trades?" 
He warns: 

Their collusion at their highest ranks to secure the financial 
stability of the largest financial institutions could be at odds with 
the investments of smaller institutions and may be at odds with 
the small investor's long term investments and goals. When 
LTCM failed many of us could have not cared less .... The 
bailout was simply put in place to save their own skins and the 
investors they serve. 

. . . We require public corporations to provide open and full 
disclosure with the public, why should the CRMPG be allowed 
to collude to rig the market against free market principles? . . . 
The CRMPG report gives them the outline to execute their 
strategy in collusion at the expense ultimately of the small investor 
.... Moral hazard has led to moral decay at the highest ranks 
of our financial institutions. Move over PPT - the CRMPG is at 
the wheel now. 

Market Manipulation and Politics 

At first blush, the notion that banks and the government are 
working together to prevent a national economic crisis by manipulating 
markets sounds benignly paternal and protective; but the wizard's 
magic that makes money appear where none existed before can also 
be used to divest small investors of their savings and for partisan 


Web of Debt 

political gain. When the economy looks good, incumbents get re- 
elected. Michael Bolser has carefully tracked the Dow against the 
"repo" pool (the "free money" made available to favored investment 
banks). His charts show that the Fed has routinely "engineered" the 
Dow and the dollar to make the economy appear sounder than it is. 
When Bolser tracked the rise in the stock market at the start of the 

2003 Iraq War, for example, he found that "the 'Iraq War Rally' was 
nothing of the sort. It was a wholly Fed-engineered exercise." 15 The 
Orwellian possibilities were suggested by Alex Wallenstein in an April 

2004 article: 

People would never give up their property rights voluntarily, 
directly. But if we can be sucked by Fed interest rate policy into 
no longer saving money (because stock market gains are so much 
higher than returns on CDs and savings bonds), and instead 
into throwing all of our retirement hopes and dreams at the 
stock market (that can be engineered into a catastrophic collapse 
in the blink of an eye), then we can all become "good little sheep." 
Then we can be made to march right up to be fleeced and then 
slaughtered and meat-packed for later consumption by our 
handlers. 16 

Even if an economic collapse is not being engineered intentionally, 
many experts are convinced that one is coming, and soon. In a 2005 
book titled The Demise of the Dollar, Addison Wiggin observes: 

How can the government promise to pay its debts when the 
total of that debt keeps getting higher and higher? It's already 
out of control. ... In fact, a collapse is inevitable and it's only a 
question of how quickly it is going to occur. The consequences 
will be huge declines in the stock market, savings becoming 
worthless, and the bond market completely falling apart. ... It 
will be a rude awakening for everyone who has become 
complacent about America's invulnerability. 17 

Is the Spider Losing Its Grip? 

Hans Schicht has another slant on the approaching day of finan- 
cial reckoning. He noted in 2003 that David Rockefeller, the "master 
spider," was then 88 years old: 

[W]herever we look, his central command is seen to be fading. 
Neither is there a capable successor in sight to take over the 


Chapter 33 - Maintaining the Illusion 

reigns. Hyenas have begun picking up the pieces. Corruption is 
rife. Rivalry is breaking up the Empire. 

What has been good for Rockefeller, has been a curse for the 
United States. Its citizens, government and country indebted to 
the hilt, enslaved to his banks. . . . The country's industrial force 
lost to overseas in consequence of strong dollar policies. ... A 
strong dollar pursued purely in the interest of the banking em- 
pire and not for the best of the country. The USA, now de- 
graded to a service and consumer nation. . . . 

With Rockefeller leaving the scene, sixty years of dollar 
imperialism are drawing to a close .... As one of the first signs 
of change, the mighty dollar has come under attack, directly on 
the currency markets and indirectly through the bond markets. 
The day of financial reckoning is not far off any longer. . . . With 
Rockefeller's strong hand losing its grip and the old established 
order fading, the world has entered a most dangerous transition 
period, where anything could happen. 18 

Or Has the Spider Just Moved Its Nest? 

With Rockefeller losing his grip and no replacement in sight, there 
is evidence that the master spider may have moved its nest back across 
the Atlantic to London, armed with a navy of pirate hedge funds that 
rule the world out of the Cayman Islands. In a March 2007 article, 
Richard Freeman observed that the Cayman Islands are a British 
Overseas Protectorate. The Caymans function as "an epicenter for 
globalization and financial warfare," with officials who have been 
hand-selected by what Freeman calls the "Anglo-Dutch oligarchy": 

For the Anglo-Dutch oligarchy, closely intertwined banks 
and hedge funds are its foremost instruments of power, to control 
the financial system, and loot and devastate companies and 
nations. . . . The three island specks in the Caribbean Sea, 480 
miles south from Florida's southern tip — which came to be 
known as the Caymans, after the native word for crocodile 
(caymana) — had for centuries been a basing area for pirates who 
attacked trading vessels. . . . 

In 1993, the decision was made to turn this tourist trap into 
a major financial power, through the adoption of a Mutual 
Funds Law, to enable the easy incorporation and/ or registration 
of hedge funds in a deregulated system. . . .The 1993 Mutual 


Web of Debt 

Fund Law had its effect: with direction from the City of London, 
the number of hedge funds operating in the Cayman Islands 
exploded: from 1,685 hedge funds in 1997, to 8,282 at the end of 
the third quarter 2006, a fivefold increase. Cayman Island hedge 
funds are four-fifths of the world total. Globally, hedge funds 
command up to $30 trillion of deployable funds. . . . According 
to reports, during 2005, the hedge funds were responsible for up to 
50% of the transactions on the London and New York stock exchanges. 
. . . The hedge funds are leading a frenzied wave of mergers and 
acquisitions, which reached nearly $4 trillion last year, and they 
are buying up and stripping down companies from auto parts 
producer Delphi and Texas power utility TXU, to Office Equities 
Properties, to hundreds of thousands of apartments in Berlin 
and Dresden, Germany. This has led to hundreds of thousands 
of workers being laid off. 

They are assisted by their Wall Street allies. Taken altogether, 
the hedge funds, with money borrowed from the world's biggest 
commercial and investment banks, have pushed the world's 
derivatives bubble well past $600 trillion in nominal value, and 
put the world on the path of the biggest financial disintegration 
in modern history. 19 

The Cracking Economic Egg 

The magnitude of the banking crisis and the desperate attempts 
to cover it up became apparent in June 2007, when two hedge funds 
belonging to Bear Stearns Company went bankrupt over derivatives 
bets involving subprime mortgages gone wrong. The parties were 
being leaned on to settle quietly, to avoid revealing that their derivatives 
were worth far less than claimed. But as Adrian Douglas observed 
in a June 30 article called "Derivatives" in 

This is not just an ugly, non-malignant tumor that can be 
conveniently cut off. This massive financial activity that bets on 
the outcome of the pricing of the underlying assets has corrupted 
the system such that those who would be responsible for paying 
out orders of magnitude more money than they have if the bets 
go against them are sucked into a black hole of moral and ethical 
destitution as they have no other choice but to manipulate the 
price of the underlying assets to prevent financial ruin. 


Chapter 33 - Maintaining the Illusion 

While derivatives may appear to be complex instruments, Douglas 
says the concept is actually simple: they are insurance contracts against 
something happening, such as interest rates going up or the stock 
market going down. Unlike with ordinary insurance policies, however, 
these are not catastrophic risks that happen infrequently. They will 
happen eventually. And if a payout event is triggered, "unlike when 
a house burns down, there will not be just a handful of claims on any 
one day, payouts will be due in the trillions of dollars on the same 
day. It is the financial equivalent of a hurricane Katrina hitting every 
US city on the same day!" Douglas observes: 

Instead of stopping this idiotic sham business from growing 
to galactic proportions, all the authorities, and all the banks, 
and all the major financial institutions around the world have 
heralded it as the best thing since sliced bread. But now all 
these players are complicit in the crime. They are all on the hook. 
The stakes are now too high. They must manipulate the 
underlying assets on a daily basis to prevent triggering the payout 
of a major derivative event. 

Derivatives are a bet against volatility. Guess what has 
happened? Surprise, surprise! Volatility has vanished. The 
VIX [the Chicago Board Options Exchange Volatility Index] looks 
like an ECG when the patient has died! Gold has an unofficial 
$6 rule. The DOW is not allowed to drop more than 200 points 
and it must rally the following day. Interest rates must not rise, 
if they do the FED must issue more of their now secret M3, ship it 
offshore to the Caribbean and pretend that an unknown foreign bank 
is buying US Treasuries like crazy. 

But the sham is coming unglued because the huge excess 
liquidity that has been injected into the system to prevent it from 
imploding is showing up as asset bubbles all over the place and 
shortages of raw materials are everywhere. There is massive 
inflation going on. There is no major economy in the world not 
inflating their money supply by less than 10% annually. 

When the derivative buyers realize what is going on and quit 
paying premiums for insurance that doesn't exist, says Douglas, "there 
will be a whole new definition of volatility!" And that brings us back 
to the parasite's challenge. When the bubble collapses, the banking 
empire that has been built on it must collapse as well .... 


Chapter 34 

"See what you have done!" the Witch screamed. "In a minute I 
shall melt away.". . . With these words the Witch fell down in a brown, 
melted, shapeless mass and began to spread over the clean boards of the 
kitchen floor. 

- The Wonderful Wizard ofOz, 
"The Search for the Wicked Witch" 

The debt bubble is showing clear signs of imploding, and 
when it does it is likely to liquidate the private banking empire 
that has been built on it. To prevent that financial meltdown, the 
Witches of Wall Street and their European affiliates have resorted to 
desperate measures, including a giant derivatives bubble that is jeop- 
ardizing the whole shaky system. In a February 2004 article called 
"The Coming Storm," the London Economist warned that top banks 
around the world were massively exposed to high-risk derivatives, 
and that there was a very real risk of an industry-wide meltdown. 
The situation was compared to that before the 1998 collapse of Long 
Term Capital Management, when "[b]ets went spectacularly wrong 
after Russia defaulted; financial markets went berserk, and LTCM, a 
very large hedge fund, had to be rescued by its bankers at the behest 
of the Federal Reserve." 1 

John Hoefle wrote in 2002 that the Fed had been quietly rescuing 
banks ever since. He contended that the banking system actually went 
bankrupt in the late 1980s, with the collapse of the junk bond market 
and the real estate bubble of that decade. The savings and loan sector 
collapsed, along with nearly every large Texas bank; and that was 
just the tip of the iceberg: 


Chapter 34 - Meltdown 

Citicorp was secretly taken over by the Federal Reserve in 1989, 
shotgun mergers were arranged for other giant banks, backdoor 
bailouts were given through the Fed's lending mechanisms, and 
bank examiners were ordered to ignore bad loans. These 
measures, coupled with a headlong rush into derivatives and other 
forms of speculation, gave the banks a veneer of solvency while actually 
destroying what was left of the U.S. banking system. 

The big banks were in trouble because of big gambles that had not 
paid off - Third World loans that had gone into default, giant corpo- 
rations that had gone bankrupt, massive derivative bets gone wrong. 
Like with the bankrupt giant Enron, profound economic weakness 
was masked by phony accounting that created a "veneer of solvency." 
Hoefle wrote: 

The U.S. banks - especially the derivatives giants - are masters 
at this game, counting trillions of dollars of worthless IOUs - 
derivatives, overblown assets, and unpayable debts - on their 
books at face value, in order to appear solvent. In the late 1980s, 
the term "zombie" was used to refer to banks which manifested 
some mechanical signs of life but were in fact dead. 

Between 1984 and 2002, bank failures were accompanied by a 
wave of consolidations and takeovers that reduced the number of banks 
by 45 percent. The top seven banks were consolidated into three - 
Citigroup, JP Morgan Chase, and Bank of America. Hoefle wrote: 

The result of all these mergers is a group of much larger, and far 
more bankrupt, giant banks. . . . [A] similar process has played 
out worldwide. . . . The global list also includes two institutions 
which specialize in pumping up the U.S. real estate bubble. Both 
Fannie Mae and Freddie Mac specialize in converting mortgages 
into mortgage-backed securities, and will vaporize when the U.S. 
housing bubble pops. 

The zombies, said Hoefle, had now taken over the asylum. In 
2002, Bank One was rumored to be a buyer for the zombie giant JP 
Morgan Chase. (This merger actually occurred in 2004.) "It was ludi- 
crous," Hoefle wrote, since on paper JP Morgan Chase had twice the 
assets of Bank One. "Still, letting Morgan fail, which it seems deter- 
mined to do, is clearly unacceptable from the standpoint of the White 
House/Federal Reserve Plunge Protection Team." 2 

In a February 2004 article titled "Cooking the Books: U.S. Banks Are 
Giant Casinos," Michael Edward concurred. He wrote that U.S. banks 


Web of Debt 

were engaging in "smoke and mirror accounting," in which they were 
merging with each other in order to hide their derivative losses with 
"paper asset" bookkeeping: 

. . . [T]he public is being conned into thinking that U.S. banks 
are still solvent because they show "gains" in their stock "paper" 
value. If the U.S. markets were not manipulated, U.S. banks would 
collapse overnight along with the entire U.S. economy. 

. . . Astronomical losses for U.S. banks (as well as most world 
banks) have been concealed with mispriced derivatives. The 
problem with this is that these losses don't have to be reported 
to shareholders, so in all truth and reality, many U.S. banks are 
already insolvent. What that means is that U.S. banks have become 
nothing less than a Ponzi Scheme paying account holders with other 
account holder assets or deposits. 

. . . Robbing Peter to pay Paul has never worked, and every 
Ponzi Scheme (illegal pyramid scam) has always ended abruptly 
with great losses for every person who invested in them. U.S. 
bank account holders are about to find this out. 3 

Has Private Commercial Banking Become Obsolete? 

According to these commentators, the secret epidemic of bank 
insolvencies is not just the result of individual mismanagement and 
overreaching but marks the inevitable end times of a Ponzi scheme 
that is inherently unsustainable. When the dollar was on the gold 
standard, banks had to deal with periodic bank "runs" because they 
did not have sufficient gold to cover their transactions. The Federal 
Reserve was instituted early in the twentieth century to provide backup 
money to prevent such runs. That effort was followed 20 years later 
by the worst depression in modern history. The gold standard was 
then abandoned, allowing larger and larger debt bubbles to flood the 
system, resulting in the derivative and housing crises looming today. 
When those bubbles pop, the only option may be another change in 
the rules of the game, a Copernican shift of the sort envisioned by 
Professor Liu. 

Robert Guttman, Professor of Economics at Hofstra University in 
New York, is another academician who feels the current banking 
system may have outlived its usefulness. In a 1994 text called How 
Credit-Money Shapes the Economy, he states, "It may well be that banks, 
as currently constituted, are in the process of becoming obsolete. Increasingly 
their traditional functions can be carried out more effectively by other 


Chapter 34 - Meltdown 

institutions . . . ." He goes on: 

American banks have been hit over the last two decades by a 
variety of adverse developments. Their traditional functions, 
taking deposits and making loans, have been subjected to 
increasing competition from less-regulated institutions. In the 
face of such market erosion on both sides of their balance-sheet 
ledger, the banks have had to find new profit opportunities. . . . 
Even though most commercial banks have managed to survive 
the surge in bad-debt losses . . . , they still face major competitive 
threats from less-regulated institutions. It is doubtful whether 
they can stop the market inroads made by pension funds, mutual 
funds, investment banks, and other institutions that benefit from 
the "marketization" of our financial system. . . . The revolution 
in computer and communications technologies has enabled 
others to access and process data at low cost. Neither lenders nor 
borrowers need banks anymore. Both sides may find it increasingly 
more appealing to deal directly with each other} 

At the time he was writing, hundreds of banks had failed after 
writing off large chunks of non-performing loans to developing coun- 
tries, farmers, oil drillers, real estate developers, and takeover artists. 
Commercial banks and thrifts facing growing bad-debt losses were 
forced to liquidate assets and tighten credit terms, producing a credit 
crunch that choked off growth. The banks were also facing growing 
competition from investment pools such as pension funds and mutual 
funds. The banks responded with a dramatic shift away from loans, 
their core business, to liquid bundles of claims sold as securities. The 
commercial banking business was also eroding, as corporations 
switched from loans to securities for funding. FDIC insurance, which 
was originally intended to protect individual savers against loss, took 
on the quite different function of bailing out failing institutions. "Such 
a shift in focus led directly to adoption of the FDIC's 'too-big-to-fail' 
policy in 1984," Guttman wrote. "The result has been increasingly costly 
government intervention which now has bankrupted the system." 


Web of Debt 

The Shady World of Investment Banking 

As banks have lost profits in the competitive commercial lending 
business, they have had to expand into investment banking to remain 
profitable. That expansion was facilitated in 1999, when the Glass- 
Steagall Act, which forbade commercial and investment banking in 
the same institutions, was repealed. Investment banking includes 
corporate fund-raising, mergers and acquisitions, brokering trades, 
and trading for the bank's own account. 5 Despite this merger of 
banking functions, however, profits continued to falter. According to 
a 2002 publication called "Growing Profits Under Pressure" by the 
Boston Consulting Group: 

As the effects of the economic downturn continue to erode 
corporate profits, large commercial banks - both global and 
regional - face growing pressures on their corporate- and 

investment-banking businesses From the outside, commercial 

banks confront increasing competition - particularly from global 
investment banks . . . that are competing more vigorously for 
commercial banks' traditional corporate transactions. In 
addition, commercial banks are finding that their corporate 
clients are increasingly becoming their rivals. . . . [C]ompanies 
today.. .meet more of their own banking needs themselves .... 
In recent years, many commercial banks have acquired 
investment banks, hoping to gain access to new clients .... But 
. . . investment-banking revenues have suffered with the decline 
in mergers and acquisitions, equity capital markets, and trading 
activities. All too often, costs have continued to rise. 6 

An article in the June 2006 Economist reported that even with the 
success of bank trading departments, the overall share values of in- 
vestment banks were falling. Evidently this was because investors 
suspected that the banks' returns had been souped up by trading with 
borrowed money, and they feared the risks involved. 7 

Meanwhile, banking as a public service has been lost to the all- 
consuming quest for profits. As noted in Chapter 18, investment banks 
make most of their profits from trading for their own accounts rather 
than from servicing customers. According to William Hummel in 
Money: What It Is, How It Works, the ten largest U.S. banks hold almost 
half the country's total banking assets. These banks, called "money 


Chapter 34 - Meltdown 

market banks" or "money center banks," include Citibank, JPMorgan 
Chase, and Bank of America. They are large conglomerates that 
combine commercial banking with investment banking. However, 
very little of their business is what we normally think of as banking - taking 
deposits, providing checking services, and making consumer or small 
business loans. Rather, says Hummel, they mainly engage in four 

• Portfolio business - asset accumulation and funding for their own 
accounts, something they do by borrowing money cheaply and 
selling the acquired assets at a premium; 

• Corporate finance - corporate lending and public offerings; 

• Distribution - the sale of the banks' own securities, including 
treasuries, municipal securities, and Euro CDs; and 

• Trading - largely market-making. 8 

Recall that market makers are the players chiefly engaged in naked 
short selling, an inherently fraudulent practice. (Chapter 19.) Patrick 
Byrne, who has been instrumental in exposing the naked shorting 
scandal, states that as much as 75 percent of the profits of big 
investment banks may come from their role as "prime brokers" — 
something he says is a fancy word for the stock loan business, or 
renting the same stock several times over. 9 Stocks are "rented" for 
the purpose of selling them short. According to an article in Forbes, 
"prime brokerage" is "the business of catering to hedge funds; 
particularly, lending securities to funds so they can execute their trading 
strategies." 10 We've seen that hedge funds are groups of investors 
colluding to acquire companies and bleed them of their assets, speculate 
in derivatives, manipulate markets, and otherwise make profits for 
themselves at the expense of workers and smaller investors. 

The big money center banks facilitating these dubious practices 
are also the banks that must periodically be bailed out by the Fed and 
the government because they are supposedly "too big to fail." Yet 
these banks are not even providing what we normally think of as 
banking services! They are "too big to fail" only because they are 
responsible for a giant Ponzi scheme that has the entire economy in its 
death grip. They have created a perilous derivatives bubble that has 
generated billions of dollars in short-term profits but has destroyed 
the financial system in the process. Collusion among mega-banks has 
made derivative trading less risky, but this has not served the larger 


Web of Debt 

community but rather has hurt small investors and the fledgling 
corporations targeted by "vulture capitalism." The fleas' gain has 
been the dog's loss. 

The Secret Nationalization of the Banks 

In a March 2007 article called "Too Big to Bail (Out)," Dave Lewis 
observes that the next major bank bailout may exceed the capacity of 
the taxpayers to keep the private banking boat afloat. Lewis is a veteran 
Wall Street trader who remembers the 1980s, when banks actually 
could fail. The "too big to fail" concept came in at the end of the 
1980s, when the savings and loans collapsed and Citibank lost 50 
percent of its share price. In 1989, Congress passed the Financial 
Institutions Reform, Recovery and Enforcement Act, which bailed out 
the S&Ls with taxpayer money. Citibank's share price also recouped 
its losses. Then in 1991, a Wall Street investment bank called Salomon 
Brothers threatened bankruptcy, after it was caught submitting false 
bids for U.S. Treasury securities and the New York Fed Chief 
announced that the bank would no longer be able to participate in 
Treasury auctions. Warren Buffett, whose company owned 12 percent 
of the stock of Salomon Brothers, negotiated heavily with Treasury 
Secretary Nicholas Brady; and Salomon Brothers was saved. After 
that, says Lewis, "too big to fail" became standard policy: 

It is now 16 years later, the thin edge of the wedge has done 
its thing and the circuit is now complete. The financial industry 
has been, in a sense, nationalized. Credit rating agencies . . . will 
now simply assume government support for large financial 
institutions. . . . [But] there are limits to the amount of support 
even the mighty US taxpayers can provide .... If the derivatives 
inspired collapse of LTCM was a problem how much more 
problematic would be a similarly inspired derivatives collapse 
at JPMorgan given their US$62. 6T in exposure. According to 
the Office of the Comptroller of the Currency . . . , this US$62.6T 
in derivatives exposure is funded by assets of only US$1. 2T. . . . 
And who will fill in the gap, US taxpayers? Are we now willing 
to upend social harmony, or what little that remains, by breaking 
promises of social security and other "entitlements" in order to keep 
big banks that mismanaged their investment portfolios afloat? And 
all this, by the way, while the upper class has been enjoying its 


Chapter 34 - Meltdown 

biggest tax breaks in decades. 

. . . The $150B bail out of the S&Ls in the late 80s caused a 
recession and cost George Bush the Elder a second term. I wonder 
what effects a $1T or even $5T bail out would cause .... Short 
of a military dictatorship, I can't imagine a bail out of that size 
for that reason passing through Congress. . . . 

What if the problem arises due to a collapse of some 
intervention scheme? Will US taxpayers be expected to bail out 
a covert scheme to keep the price of gold down? or oil? More to 
the point, could US taxpayers bail out such schemes? . . . [I]n the 
event support was needed and could be obtained under these 
conditions, why would anyone want to buy US bonds? 11 

If the financial industry has indeed been nationalized, and if we 
the taxpayers are footing the bill, we can and should demand a bank- 
ing system that serves the taxpayers' interests rather than working at 
cross-purposes with them. 

The Systemic Bankruptcy of the Banks 

Only a few big banks are considered too big to fail, entitling them 
to taxpayer bailout; but in some sense, all banks operating on the frac- 
tional reserve system are teetering on bankruptcy. Recall the defini- 
tion of the term: "being unable to pay one's debts; being insolvent; 
having liabilities in excess of a reasonable market value of assets held." 
In an article called "Fractional Reserve Banking," Murray Rothbard 
put the problem like this: 

[Depositors] think of their checking account as equivalent to 
a warehouse receipt. If they put a chair in a warehouse before 
going on a trip, they expect to get the chair back whenever they 
present the receipt. Unfortunately, while banks depend on the 
warehouse analogy, the depositors are systematically deluded. 
Their money ain't there. 

An honest warehouse makes sure that the goods entrusted 
to its care are there, in its storeroom or vault. But banks operate 
very differently . . . Banks make money by literally creating money 
out of thin air, nowadays exclusively deposits rather than bank 
notes. This sort of swindling or counterfeiting is dignified by the 
term "fractional-reserve banking," which means that bank 
deposits are backed by only a small fraction of the cash they 


Web of Debt 

promise to have at hand and redeem. 12 

Before 1913, if too many of a bank's depositors came for their 
money at one time, the bank would have come up short and would 
have had to close its doors. That was true until the Federal Reserve 
Act shored up the system by allowing troubled banks to "borrow" 
money from the Federal Reserve, which could create it on the spot by 
selling government securities to a select group of banks that created 
the money as bookkeeping entries on their books. By rights, Rothbard 
said, the banks should be put into bankruptcy and the bankers should 
be jailed as embezzlers, just as they would have been before they 
succeeded in getting laws passed that protected their swindling. 
Instead, big banks are assured of being bailed out from their folly, 
encouraging them to take huge risks because they are confident of 
being rescued if things go amiss. This "moral hazard" has now been 
built into the decision-making process. But small businesses don't get 
bailed out when they make risky decisions that put them under water. 
Why should big banks have that luxury? In a "free" market, big banks 
should be free to fail like any other business. It would be different if 
they actually were indispensable to the economy, as they claim; but 
these global mega-banks spend most of their time and resources making 
profits for themselves, at the expense of the small consumer, the small 
investor, and small countries. 

There are more efficient ways to get the banking services we need 
than by continually feeding and maintaining the parasitic banking 
machine we have now. It may be time to cut the mega-banks loose 
from the Fed's apron strings and let them deal with the free market 
forces they purport to believe in. Without the collusion of the Plunge 
Protection Team, the CRMPG and the Federal Reserve, some major 
banks could soon wind up in bankruptcy. The Federal Deposit 
Insurance Corporation (FDIC) deals with bankrupt banks by putting 
them into receivership, a form of bankruptcy in which a company can 
avoid liquidation by reorganizing with the help of a court-appointed 
trustee. When a bank is put into receivership, the trustee is the FDIC, 
an agency of the federal government. In return for bailing the bank 
out, the FDIC has the option of retaining the bank as a public asset. 
Why this might not be the disaster for the larger community that has 
been predicted, and might even work out to the public's benefit, is 
discussed in Section VI. 


Chapter 34 - Meltdown 

Shelter from the Storm 

What can we do to protect ourselves and our assets in the 
meantime? Like Auntie Em, market "bears" warn to run for the cellar. 
They say to prepare for the coming storm by getting out of U.S. stocks, 
the U.S. dollar, and excess residential real estate, and to invest instead 
in gold and silver, precious metal stocks, oil stocks, foreign stocks, and 
foreign currencies. Many good books and financial newsletters are 
available on this subject. 13 

People in serious Doomsday mode go further. They advise storing 
canned and dry food, drinking water, and organic seeds for sprouting 
and planting; investing in a water purifier, light source, stove and 
heater that don't depend on functioning electrical outlets; keeping extra 
cash in the family safe for when the banks suddenly close their doors; 
and storing gold and silver coins for when paper money becomes 
worthless. They recommend starting a garden in the backyard, a 
hydroponic garden (plants grown in water), or a window-box garden; 
or joining a local communal farming project. They note that people 
facing financial collapse in other countries are better prepared to deal 
with that sort of disaster than Americans are, because they have been 
farming their own small gardens and surviving in barter economies 
for centuries. Americans need to study, form groups, and practice in 
order to be prepared. Again, many good Internet websites are available 
on this subject. Community currency options are discussed in Chapter 

Those are all prudent alternatives in the event of economic collapse; 
but in the happier ending to our economic fairytale, the financial system 
would be salvaged before it collapses. We can stock the cellar just in 
case there is a cyclone, but to succumb to the fear of scarcity is to let 
the Wicked Witch prevail, to let the cartel once again wind up with all 
the houses and the stock bargains. What then of the American dream, 
the liberty and justice for all in a land of equal opportunity promised 
by the Declaration of Independence and the Constitution? The irony 
is that our economic nightmare is built on an illusion. We have been 
tricked into believing we are inextricably mired in debt, when the 
"debt" is for an advance of "credit" that was ours all along. While 
trouble boils and bubbles in the pots of the Witches of Wall Street, the 
Good Witch stands waiting in the wings, waiting for us to remember 
our magic slippers and come into our power .... 


Section V 


"You had to find it out for yourself. Now those magic slippers 
will take you home in two seconds." 

- Glinda the Good Witch to Dorothy 

Chapter 35 

Somewhere over the rainbow 
Skies are blue, 

And the dreams that you dare to dream 
Really do come true. 

- Song immortalized by Judy Garland 
in The Wizard of Oz 

One of the most dramatic scenes in the MGM version of The 
Wizard of Oz comes when Dorothy's cyclone-tossed house 
falls from the sky. The world transforms, as she opens the door and 
steps from the black and white barrenness of a Kansas farmhouse into 
the technicolor wonderland of Oz. The world transforms again when 
Dorothy and her companions don green-colored glasses as they enter 
the Emerald City. In the Wizard's world, reality can be changed just 
by looking at things differently. Historian David Parker wrote of 
Baum's fairytale: 

[T]he book emphasized an aspect of theosophy that Norman 
Vincent Peale would later call "the power of positive thinking": 
theosophy led to "a new upbeat and positive psychology" that 
"opposed all kinds of negative thinking - especially fear, worry 
and anxiety." It was through this positive thinking, and not 
through any magic of the Wizard, that Dorothy and her 
companions (as well as everyone else in Oz) got what they 
wanted. 1 

It would become a popular Hollywood theme - Dumbo's magic 
feather, Polly anna's irrepressible positive thinking, the Music Man's 
"think system" for making beautiful music, the "Unsinkable" Molly 
Brown. Thinking positively was not just the stuff of children's fantasies 


Chapter 35 - Stepping from Scarcity into Abundance 

but was deeply ingrained in the American psyche. "I have learned," 
said Henry David Thoreau, "that if one advances confidently in the 
direction of his dreams, and endeavors to live the life he has imagined, 
he will meet with a success unexpected in common hours." William 
James, another nineteenth century American philosopher, said, "The 
greatest discovery of my generation is that a human being can alter 
his life by altering his attitudes of mind." Franklin Roosevelt broadcast 
this upbeat message in his Depression-era "fireside chats," in which 
he entered people's homes through that exciting new medium the radio 
and galvanized the country with encouraging words. "The only thing 
we have to fear is fear itself," he said in 1933, when the "enemy" was 
poverty and unemployment. Andrew Carnegie, one of the multi- 
millionaire Robber Barons, was another firm believer in achievement 
through positive thinking. "It is the mind that makes the body rich," 
he maintained. Believing that financial success could be reduced to a 
simple formula, he commissioned a newspaper reporter named 
Napoleon Hill to interview over 500 millionaires to discover the common 
threads of their success. Hill then memorialized the results in his 
bestselling book Think and Grow Rich . 

Thinking positively was a trait of the Robber Barons themselves, 
who for all their mischief were a characteristically American 
phenomenon. They thought big. If there was a criminal element to 
their thinking, it was a crime the law had not yet codified. The Wild 
West, the Gold Rush, the Gilded Age, the Roaring Twenties — all were 
part of the wild and reckless youth of the nation. The Robber Barons 
were a product of the American capitalist spirit, the spirit of believing 
in what you want and making it happen. An aspect of a "free" market 
is the freedom to steal, which is why economics must be tempered 
with the Constitution and the law. That was the fatal flaw in the 
laissez-faire free market economics of the nineteenth century: it allowed 
opportunists to infiltrate and monopolize industry. 

America's Founding Fathers saw the necessity of designing a 
government that would protect the inalienable rights of the people 
from the power grabs of the unscrupulous. Today we generally think 
we want less government, not more; but our forebears had a different 
view of the function of government. The Declaration of Independence 

[W]e hold these Truths to be self evident, that all men are created 
equal, that they are endowed by their Creator with certain 
unalienable Rights, that among these are Life, Liberty, and the 


Web of Debt 

Pursuit of Happiness - That to secure these Rights, Governments 
are instituted among Men, deriving their just Powers from the Consent 
of the Governed. 

The capitalist spirit of achieving one's dreams needed to operate 
within an infrastructure that insured and supported a fair race. 
Naming the villains and locking them up could help temporarily; but 
to create a millennial Utopia, the legal edifice itself had to be secured. 

Waking from the Spell 

When Frank Baum wrote his famous fairytale at the turn of the 
twentieth century, the notion that a life of scarcity could be transformed 
in an instant into one of universal abundance did not seem entirely 
far-fetched. It was an era of miracles, when scientists were bringing 
electricity, mechanized transportation, and the promise of free energy 
to America. Explosive technological advances evoked visions of a 
Utopian future filled with modern transportation and communication 
facilities, along with jobs, housing and food for all. 2 

Catapulting the country into universal abundance was possible, 
but it did not happen. Instead, a darker form of witchcraft enthralled 
the country. By the time The Wizard of Oz was made into a musical 
in the 1930s, the economy had again fallen into a major depression. 
Yip Harburg, who wrote the lyrics to "Somewhere Over the Rain- 
bow," had a long list of hit songs, including "Brother, Can You Spare 
a Dime?" Harburg was not actually a member of the Communist 
Party, but he was a staunch advocate of a variety of left-leaning causes. 
His Hollywood career came to a halt when he was blacklisted in the 
1950s, another visionary fallen to an agenda of fear and control. 

By the end of the twentieth century, however, science had again 
reached a stage of development where abundance for all seemed within 
reach. Buckminster Fuller said in 1980: 

We are blessed with technology that would be indescribable to 
our forefathers. We have the wherewithal, the know-it-all to 
feed everybody, clothe everybody, and give every human on 
Earth a chance. We know now what we could never have known 
before - that we now have the option for all humanity to make it 
successfully on this planet in this lifetime. Whether it is to be Utopia 
or Oblivion will be a touch-and-go relay race right up to the 
final moment. 


Chapter 35 - Stepping from Scarcity into Abundance 

The race between Utopia and Oblivion reflects two different visions 
of reality. One sees a world capable of providing for all. The other 
sees a world that is too small for its inhabitants, requiring the 
annihilation of large segments of the population if the rest are to 
survive. The prevailing scarcity mentality focuses on shortages of oil, 
water and food. But the real shortage, as Benjamin Franklin explained 
to his English listeners in the eighteenth century, is in the medium of 
exchange. If sufficient money could be made available to develop 
alternative sources of energy, alternative means of extracting water 
from the environment, and more efficient ways of growing food, there 
could be abundance for all. The notion that the government could 
simply print the money it needs is considered unrealistically Utopian 
and inflationary; yet banks create money all the time. The chief reason 
the U.S. government can't do it is that a private banking cartel already 
has a monopoly on the practice. 

Growth in M3 is no longer officially being reported, but by 2007, 
reliable private sources put it at 11 percent per year. 3 That means that 
over one trillion dollars are now being added to the economy annually. 
Where does this new money come from? It couldn't have come from 
new infusions of gold, since the country went off the gold standard in 
1933. All of this additional money must have been created by banks 
as loans. As soon as the loans are paid off, the money has to be 
borrowed all over again, just to keep money in the system; and it is 
here that we find the real cause of global scarcity: somebody is paying 
interest on most of the money in the world all of the time. A dollar accruing 
interest at 5 percent, compounded annually, becomes two dollars in 
about 14 years. At that rate, banks siphon off as much money in interest 
every 24 years as there was in the entire world 14 years earlier} That 
explains why M3 has increased by 100 percent or more every 14 years 
since the Federal Reserve first started tracking it in 1959. According 
to a Fed chart titled "M3 Money Stock," M3 was about $300 billion in 
1959. In 1973, 14 years later, it had grown to $900 billion. In 1987, 14 

' This assumes that the debt is not paid but just keeps compounding, but in the 
system as a whole, that would be true. When old loans get paid off, debt-money 
is extinguished, so new loans must continually be taken out just to keep the 
money supply at its current level. And since banks create the principal but not 
the interest necessary to pay off their loans, someone somewhere has to 
continually be taking out new loans to create the money to cover the interest due 
on this collective debt. Interest then continually accrues on these new loans, 
compounding the interest due on the whole. 


Web of Debt 

years after that, it was $3,500 billion; and in 2001, 14 years after that, 
it was $7,200 billion. 4 To meet the huge interest burden required to 
service all this money-built-on-debt, the money supply must 
continually expand; and for that to happen, borrowers must continually 
go deeper into debt, merchants must continually raise their prices, 
and the odd men out in the bankers' game of musical chairs must 
continue to lose their property to the banks. Wars, competition and 
strife are the inevitable results of this scarcity-driven system. 

The obvious solution is to eliminate the parasitic banking scheme 
that is feeding on the world's prosperity. But how? The Witches of 
Wall Street are not likely to release their vice-like grip without some 
sort of revolution; and a violent revolution would probably fail, because 
the world's most feared military machine is already in the hands of 
the money cartel. Violent revolution would just furnish them with an 
excuse to test their equipment. The first American Revolution was 
fought before tasers, lasers, tear gas, armored tanks, and depleted 
uranium weapons. 

Fortunately or unfortunately, in the eye of today's economic 
cyclone, we may have to do no more than watch and wait, as the 
global pyramid scheme collapses of its own weight. In the end, what 
is likely to bring the house of cards down is that the Robber Barons 
have lost control of the propaganda machine. Their intellectual foe is 
the Internet, that last bastion of free speech, where even the common 
blogger can find a voice. As President John Adams is quoted as saying 
of the revolution of his day: 

The Revolution was effected before the war commenced. The 
Revolution was in the hearts and minds of the people. . . . This 
radical change in the principles, opinions, sentiments, and affections 
of the people, was the real American Revolution. 

Today the corporate media are gradually losing control of public 
opinion; but the Money Machine remains shrouded in mystery, largely 
because the subject is so complex and forbidding. Richard Russell is a 
respected financial analyst who has been publishing The Dow Theory 
Letter for over half a century. He observes: 

The creation of money is a total mystery to probably 99 percent 
of the US population, and that most definitely includes the Congress 
and the Senate. The takeover of US money creation by the Fed is one 
of the most mysterious and ominous acts in US history. . . . The 
legality of the Federal Reserve has never been "tried" before the 
US Supreme Court. 5 


Chapter 35 - Stepping from Scarcity into Abundance 

We the people could try bringing suit before the Supreme Court; 
but the courts, like the major media, are now largely under the spell of 
the financial/ corporate cartel. There are honest and committed judges, 
congresspersons and reporters who could be approached; but to make 
a real impact will take a vigorous movement from an awakened and 
aroused populace ready to be heard and make a difference, a popular 
force too strong to be ignored. When a certain critical mass of people 
has awakened, the curtain can be thrown aside and the Wizard's hand 
can be exposed. But before we can build a movement, we need to be 
ready with an action plan, an ark that will keep us afloat when the 
flood hits. What sort of ark might that be? We'll begin by looking at a 
number of alternative models that have been developed around the 

Perpetual Christmas in Guardiagrele, Italy 

One interesting experiment in alternative financing was reported 
in the October 7, 2000 Wall Street Tournal . It was the brainchild of 
Professor Giacinto Auriti, a wealthy local academic in Guardiagrele, 
Italy. According to the Tournal : 

Prof. Auriti . . . hopes to convince the world that central bankers 
are the biggest con artists in modern history. His main thesis: 
For centuries, central banks have been robbing the common man 
by the way they put new money in circulation. Rather than 
divide the new cash among the people, they lend it through the 
banking system, at interest. This practice, he argues, makes the 
central banks the money's owners and makes everyone else their 
debtors. He goes on to conclude that this debt-based money has 
roughly half the purchasing power it would have if it were issued 
directly to the populace, free. 

To prove his thesis, Professor Auriti printed up and issued his own 
debt-free bills, called simec. He agreed to trade simec for lire, and to 
redeem each simec for two lire from local merchants. The result: 

Armed with their simec, the townsfolk — and later their 
neighbors elsewhere in central Italy's Abruzzo region — stormed 
participating stores to snap up smoked prosciutto, designer shoes 
and other goods at just half the lire price. 

"At first, people thought this can't be true, there must be a 
rip-off hidden somewhere," says Antonella Di Cocco, a guide at 
a local museum. "But once people realized that the shopkeepers 


Web of Debt 

were the only ones taking the risk, they just ran to buy all these 
extravagant things they never really needed." Often, they raided 
their savings accounts in the process. 

The participating shopkeepers, some of whom barely eked 
out a living before the simec bonanza, couldn't have been happier. 
"Every day was Christmas," Pietro Ricci recalls from behind the 
counter of his cavernous haberdashery. 

Neither Mr. Ricci nor his fellow merchants were stuck with 
their simec for long. Once a week, they turned them in to Prof. 
Auriti, recouping the full price of their goods. 

"We doubled the money in people's pockets, injecting blood 
into a lifeless body," says Prof. Auriti. "People were so happy, 
they thought they were dreaming." 

Non-participating stores, meanwhile, remained empty week 
after week. ... By mid- August, says the professor, a total of 
about 2.5 billion simec had circulated. 6 

The professor had primed the pump by doubling the town's money 
supply. As a result, goods that had been sitting on the shelves for lack 
of purchasing power started to move. The professor himself lost money 
on the deal, since he was redeeming the simec at twice what he had 
charged for them; but the local merchants liked the result so much 
that they eventually took over the project. When there were enough 
simec in circulation for the system to work without new money, the 
professor was relieved of having to put his own money into the venture. 
The obvious limitation of his system is that it requires a wealthy local 
benefactor to get it going. Ideally, the benefactor would be the 
government itself, issuing permanent money in the form of the national 

Private Silver and Gold Exchanges 

An option that appeals to people concerned with the soundness of 
the dollar is to trade in privately-issued precious metal coins. Private 
silver and gold exchanges go back for centuries. The U.S. dollar is 
defined in the Constitution in terms of silver, and at one time people 
could bring their own silver to the mint to be turned into coins. In 
1998, a private non-profit organization call NORFED (the National 
Organization for the Repeal of the Federal Reserve Act and the Internal 
Revenue Code) began issuing a currency called the Liberty Dollar, 
which was backed by gold and silver. Liberty Dollars took the form of 


Chapter 35 - Stepping from Scarcity into Abundance 

minted metal pieces, gold and silver certificates, and electronic 
currency. Legally, said NORFED's website, the Liberty Dollar 
certificates were receipts guaranteeing that the holder had ownership 
of a certain sum of silver or gold stored in a warehouse in Coeur 
d'Alene, Idaho. The silver was insured and audited monthly, and the 
Certificates were reported to be more difficult to counterfeit even than 
Federal Reserve Notes. Liberty Dollars were marketed at a discount 
and were exchanged at participating neighborhood stores dollar for 
dollar with U.S. dollars. The silver that backed the NORFED 
Certificates, however, was only about half the face value of the 
Certificates (depending on the variable silver market). The difference 
went to NORFED for its costs and to support its efforts to have the 
Federal Reserve and federal income tax abolished. 7 

By 2006, NORFED claimed a circulation of $20 million, making 
the Liberty Dollar the second most popular American currency after 
Federal Reserve Notes. That was true until September 2006, when a 
spokesman for the U.S. Mint declared the coins to be illegal because 
they could be confused with U.S. coins. "The United States Mint is 
the only entity that can produce coins," said the spokesman. In 
November 2007, the Liberty Dollar offices were raided by the FBI and 
the U.S. Secret Service. The company's owner sent an email to 
supporters saying the FBI had taken not only all the gold, silver, and 
platinum but almost two tons of "Ron Paul Dollars" — commemorative 
coins stamped with the likeness of Presidential candidate Ron Paul 
(R-TX), the fearless champion of the money reform camp seeking to 
have the Federal Reserve abolished. The FBI also seized computers 
and files and froze the Liberty Dollar bank accounts. The seizure 
warrant stated that it was issued for counterfeiting, money laundering, 
mail fraud, wire fraud, and conspiracy. 

That unsettling development underscores one of the hazards of 
alternative currencies: their legal standing can be challenged. And 
even if it isn't, privately-issued money may be refused by merchants 
or by banks. In an effort to remedy the legal problem, in December 
2007 Ron Paul introduced "The Free Competition in Currency Act," 
a bill seeking to legalize the use of currencies that compete with the 
Federal Reserve's United States Dollar. Paul said: 

One particular egregious recent example is that of the Liberty 
Dollar, in which federal agents seized millions of dollars worth 
of private currency held by a private mint on behalf of thousands 
of people across the country. . . . We stand on the precipice of an 


Web of Debt 

unprecedented monetary collapse, and as a result many people 
have begun to look for alternatives to the dollar. ... I believe 
that the American people should be free to choose the type of 
currency they prefer to use. The ability of consumers to adopt 
alternative currencies can help to keep the government and the 
Federal Reserve honest, as the threat that further inflation will 
cause more and more people to opt out of using the dollar may 
restrain the government from debasing the currency. 8 

There are other limitations to using precious metal coins as a 
currency, however, and one of them is that a substantial markup is 
necessarily involved. The value stamped on the coins must be 
significantly higher than the metal is worth, just to keep the coins 
from being smelted for their metal content whenever the metal's market 
value goes up. But diluting the value of the currency would seem to 
defeat the purpose of holding precious metals, which is to preserve 
value. To remedy that problem, it has been proposed that the coins 
could be stamped merely with their precious metal weight, allowing 
their value to fluctuate with the "spot" market for the metal. That 
solution, however, poses another set of problems. Shopkeepers 
accepting the coins would have to keep checking the Internet to 
determine their value. 

Another obvious downside of precious metal coins is that they are 
cumbersome to carry around and to trade, particularly for large trans- 
actions. "GoldMoney" and "E-gold" are online precious metal ex- 
changes that address this problem by providing a convenient way to 
own and transfer gold without actually dealing with the physical metal. 
According to the GoldMoney website, when you buy "goldgrams" 
you own pure gold in a secure vault in London. GoldMoney can be 
used as currency by "clicking" goldgrams online from one account to 
another. 9 Online gold is a hassle-free way to buy gold, making it a 
good investment alternative; but it too has drawbacks as a currency. 
Like gold coins, it involves a certain markup, and its value fluctuates 
with the volatile gold market. (See Chart, page 346.) People on fixed 
incomes with fixed rents generally prefer not to gamble. They like to 
know exactly what they have in the bank. 

Gold and silver are excellent ways to store value, but you don't 
need to use them as a medium of exchange. You can just buy bullion 
or coins and keep them in a safe place. The gold versus fiat question is 
explored further in Chapter 36. 


Chapter 35 - Stepping from Scarcity into Abundance 

Gold Price 1975-2006 

Community Banking: The Grameen Bank of Bangladesh 

Another creative innovation in local financing is the community- 
owned bank. Desperately poor people may be kept that way because 
they lack the collateral to qualify for loans from private corporate banks. 
Nobel Laureate Muhammad Yunus designed the Grameen (or "Vil- 
lage") Bank of Bangladesh so that ownership and control would re- 
main in the hands of the borrowers. As soon as a borrower accumu- 
lates sufficient savings, she buys one (and only one) share in the bank, 
for the very modest sum of three U.S. dollars. The bank's website 
states that it is 92 percent owned by its borrowers, with the Bangladesh 
government owning the remaining 8 percent. The interest rate for 
loans is set so that after paying all expenses, the bank makes a modest 
profit, which is returned to the shareholder-borrowers in the form of 
dividends. The bank's website reports that 54 percent of its borrowers 
have crossed the poverty line and another 27 percent are very close to 
it, beginning with loans of as little as $50. 10 By August 2006, the bank 
had served 5 million borrowers over a period of 25 years. 11 

The Grameen Bank has asserted its independence from the private 
corporate banking system by providing loans to people who would 
otherwise be considered bad credit risks, but the currency it lends is 
still the national currency, issued by the government and controlled 
by big corporate banks. Other community models operate indepen- 
dently of big banks, precious metals, and the government .... 


Chapter 36 

It is as ridiculous for a nation to say to its citizens, "You must 
consume less because we are short of money," as it would be for an 
airline to say, "Our planes are flying, but we cannot take you because 
we are short of tickets. " 

— Sheldon Entry, Billions for the Bankers, Debts for the People 

Money" is a token representing value. A monetary system is 
a contractual agreement among a group of people to accept 
those tokens at an agreed-upon value in trade. The ideal group for 
this contractual agreement is the larger community called a nation, 
but if that larger group can't be brought to the task, any smaller group 
can enter into an agreement, get together and trade. Historically, 
community currencies have arisen spontaneously when national 
currencies were scarce or unobtainable. When the German mark 
became worthless during the Weimar hyperinflation of the 1920s, many 
German cities began issuing their own currencies. Hundreds of 
communities in the United States, Canada and Europe did the same 
thing during the Great Depression, when unemployment was so high 
that people had trouble acquiring dollars. People lacked money but 
had skills, and there was plenty of work to be done. Complementary 
local currencies quietly co-existed along with official government 
money, increasing liquidity and facilitating trade. Like the medieval 
tally, these currencies were simply credits attesting that goods or services 
had been received, entitling the bearer to trade the credit for an 
equivalent value in goods or services in the local market. 


Chapter 36 - The Community Currency Movement 

Community currencies now operate legally in more than 35 
countries, and there are over 4,000 local exchange programs 
worldwide. Local or private exchange systems come in a variety of 
forms. Besides private gold and silver exchanges, they include local 
paper money, computerized systems of credits and debits, systems for 
bartering labor, and systems for trading local agricultural products. 
What distinguishes them from most national currencies is that they are 
not created as a debt to private banks, and they don't get siphoned off 
from the community to distant banks in the form of interest. They stay 
in town, stimulating local productivity. Local currencies can "prime 
the pump" with new money, funding local projects without adding to 
the community debt. Many governments actively support them, and 
others give unofficial support. Experience shows that these additions 
to the money supply strengthen rather than threaten national financial 
stability. Besides their monetary functions, local exchange systems 
have served to bring communities together, funding cooperative 
businesses where members can sell goods, new skills can be learned, 
and public markets can be held. 

Creative Responses to Disaster: 
The Example of Argentina 

In 1995, Argentina went bankrupt. The government had adopted 
all the policies mandated by the International Monetary Fund, includ- 
ing "privatization" (the sale of public assets to private corporations) 
and pegging the Argentine peso to the U.S. dollar. The result was an 
overvalued peso, massive economic contraction, and collapse of the 
financial system. People rushed to their banks to withdraw their life 
savings, only to be told that their banks had permanently closed. Lawns 
soon turned into vegetable gardens, and local systems sprang up for 
bartering goods. One environmental group held a massive yard sale, 
where people brought what they had to sell and received tickets rep- 
resenting money in exchange. The tickets were then used to barter 
the purchase of other goods. This system of paper receipts for goods 
and services developed into the Global Exchange Network (Red Global 
de Trueque or RGT), which went on to become the largest national 
community currency network in the world. The model spread through- 
out Central and South America, growing to 7 million members and a 
circulation valued at millions of U.S. dollars per year. 


Web of Debt 

Other financial innovations were devised in Argentina at the local 
provincial government level. Provinces short of the national currency 
resorted to issuing their own. They paid their employees with paper 
receipts called "Debt-Cancelling Bonds" that were in currency units 
equivalent to the Argentine Peso. These could be called "negotiable 
bonds" (bonds that are legally transferable and negotiable as currency), 
except that they did not pay interest. They were closer to the "non- 
interest-bearing bonds" proposed by Jacob Coxey in the 1890s for fund- 
ing state and local projects. The bonds canceled the provinces' debts 
to their employees and could be spent in the community. The Argen- 
tine provinces had actually "monetized" their debts, turning their 
bonds or I.O.U.s into legal tender. 1 

Studies showed that in provinces in which the national money 
supply was supplemented with local currencies, prices not only did 
not rise but actually declined compared to other Argentine provinces. 
Local exchange systems allowed goods and services to be traded that 
would not otherwise have been on the market, causing supply and 
demand to increase together. The system had some flaws, including 
the lack of adequate controls against counterfeiting, which allowed 
large amounts of inventory to be stolen with counterfeit scrip. By the 
summer of 2002, the RGT had shrunk to 70,000 members; but it still 
remains a remarkable testament to what can be done at a grassroots 
level, when neighbors get together to trade with their own locally- 
grown currency. 

Alternative Paper Currencies in the United States 

More than 30 local paper currencies are now available in North 
America. One that has been particularly successful is the Ithaca HOUR, 
originated by Paul Glover in Ithaca, New York. The HOUR is paper 
scrip that reads on the back: 

This is money. This note entitles the bearer to receive one hour 
of labor or its negotiated value in goods and services. Please 
accept it, then spend it. Ithaca HOURS stimulate local business 
by recycling our wealth locally, and they help fund new job 
creation. Ithaca HOURS are backed by real capital: our skills, 
our muscles, our tools, forests, fields and rivers. 

One Ithaca HOUR is considered to be the equivalent of ten dollars, 
the average hourly wage in the area. More highly skilled services are 


Chapter 36 - The Community Currency Movement 

negotiated in multiples of HOURS. A directory is published every 
couple of months that lists the goods and services people in the com- 
munity are willing to trade for HOURS, and there is an HOUR bank. 
People can use HOURS to pay rent, shop at the farmers' market, or 
buy furniture. The local hospital accepts them for medical care. Sev- 
eral million Ithaca HOURS' worth of transactions have occurred since 
1991. A Home Town Money Starter Kit is available for $25 or 2-1/2 
HOURS from Ithaca MONEY, Box 6578, Ithaca, New York 14851. 

Another successful credit program was originated by Edgar Cahn, 
a professor of law at the University of the District of Columbia, to help 
deal with inadequate government social programs. Like Glover, Cahn 
set out to create a new kind of money that was independent of both 
government and banks, one that could be created by people them- 
selves. The unit of exchange in his system, called a "Time Dollar," 
parallels the Ithaca HOUR in being valued in man/hours. In a land- 
mark ruling, the Internal Revenue Service held that Cahn's service 
plan was not "barter" in the commercial sense and was therefore tax- 
exempt. The ruling helped the program to spread quickly around the 
country. Cahn notes that social as well as economic benefits have 
resulted from this sort of program: 

[T]he very process of earning credits knits groups together .... 
They begin having pot-luck lunches; and they begin forming 
neighborhood crime watch things, and they begin looking after 
each other and checking in; and they begin to set up food bank 
coops. [The process] seems to act as a catalyst for the creation of 
group cohesion in a society where that kind of catalyst is difficult 
to find. 2 

Local scrip has also been used to tide farmers over until harvest. 
"Berkshire Farm Preserve Notes" were printed by a farmer when a 
bank in rural Massachusetts refused to lend him the money he needed 
to make it through the winter. Customers would buy the Notes for $9 
in the winter and could redeem them for $10 worth of vegetables in 
the summer. With small family farms rapidly disappearing, local cur- 
rencies of this type are a way for the community to help farm families 
that have been abandoned by the centralized monetary system. Pri- 
vate currencies provide the tools to bind communities together, sup- 
port local food growers and maintain food supplies. 3 

Bernard Lietaer, author of The Future of Money, describes other 
private currency innovations, including a system devised in Japan for 
providing for elderly care that isn't covered by national health 


Web of Debt 

insurance. People help out the elderly in return for "caring relationship 
tickets" that are put into a savings account. They can then be used 
when the account holder becomes disabled, or can be sent electronically 
to elderly relatives living far away, where someone else will administer 
care in return for credits. Another interesting model is found in Bali, 
where communities have a dual money system. Besides the national 
currency, the Balinese use a local currency in which the unit of account 
is a block of time of about three hours. The local currency is used 
when the community launches a local project, such as putting on a 
festival or building a school. The villagers don't have to compete with 
the outside world to generate this currency, which can be used to 
accomplish things for which they would not otherwise have had the 
funds. 4 

The Frequent Flyer Model: 
Supplemental Credit Systems 

Another innovation that has served to expand the medium of 
exchange is the development of corporate credits such as airline 
frequent flyer miles, which can now be "earned" and "spent" in a 
variety of ways besides simply flying on the issuing airline. In some 
places, frequent flyer miles can be spent for groceries, telephone calls, 
taxis, restaurants and hotels. Lietaer proposes extending this model 
to local governments, to achieve community ends without the need to 
tax or vote special appropriations. For example, a system of "carbon 
credits" could reward consumers for taking measures that reduce 
carbon emissions. The credits would be accepted as partial payment 
for other purchases that serve to reduce carbon emissions, producing 
a snowball effect; and businesses accepting the credits could use them 
to pay local taxes. 5 

Parallel Electronic Currencies: 
The LETS System 

Alternative currency systems got a major boost with the advent of 
computers. No longer must private coins be minted or private bills be 
printed. Trades can now be done electronically. The first electronic 
currency system was devised after IBM released its XT computer to 
the public in 1981. Canadian computer expert Michael Linton built 
an accounting database, and in 1982 he introduced the Local Exchange 


Chapter 36 - The Community Currency Movement 

Trading System (LETS), a computerized system for recording 
transactions and keeping accounts. 

Like Cotton Mather more than two centuries earlier, Linton had 
redefined money. In his scheme, it was merely "an information system 
for recording human effort." A LETS credit comes into existence when 
a member borrows the community's credit to purchase goods or 
services. The credit is extinguished when the member gives goods or 
services back to the community in satisfaction of his obligation to repay 
the credits. The exchange operates without any form of "backing" or 
"reserves." Like the tally system of medieval England, it is just an 
accounting scheme tallying credits in and debits out. LETS credits 
cannot become scarce any more than inches can become scarce. They 
are tax-free and interest-free. They can be stored on a computer 
without even printing a paper copy. They are simply information. 
There are now at least 800 Local Exchange Trading Systems (LETS) in 
Europe, New Zealand, and Australia. They are less popular in the 
United States, but community currency advocate Tom Greco feels they 
will become more popular as conventional economies continue to 
decline and more people become "marginalized." 

In a website called "Travelling the World Without Money," Aus- 
tralian enthusiast James Taris tells of his personal experiences with 
the LETS system. At a time when he had quit his job and was watch- 
ing his money carefully, he attended a LETS group meeting in his 
local community, where he learned that he could obtain a variety of 
services just for contributing an equivalent amount of his time. The 
result was the first and best professional massage he had ever had, a 
luxury for which he could not justify paying $60 cash when he was 
gainfully employed. He "paid" for this and other services by learning 
various Internet and desktop publishing skills and contributing those 
skills to the group, something he quite enjoyed. He has been demon- 
strating the potential of the system by traveling around the world with 
very little conventional money. 6 

"Friendly Favors" is a LETS-type computerized exchange system 
that has grown beyond the local community into a worldwide database 
of over 12,000 members. The system tracks the exchange of 
"Thankyou's," a unit of measure considered to be the equivalent of 
one dollar saved due to a friendly discount or favor received. The 
database also stores the photos, resumes, talents, interests and 
community-building skills of participants. Developed by Sergio Lub 
and Victor Grey of Walnut Creek, California, is a non- 
commercial service "to interconnect those envisioning a world that 


Web of Debt 

works for all." Unlike most LETS systems, which have evolved among 
people short of money looking for alternative ways to trade, the Friendly 
Favors membership includes people who are financially well off and 
highly credentialed, who are particularly interested in the human 
resources potential of the system. As of May 2004, the Friendly Favors 
membership was spread over more than 100 countries and its database 
was shared by over 200 groups with a collective membership of over 
42,000, making it potentially the largest source of human resources 
available on the Internet. 

A number of good Internet sites are devoted to the community 
currency concept, including;; Carol 
Brouillet's site at; and The International Tournal 
of Community Currency Research at For a good 
general discussion of alternative money proposals, see Tom Greco's 
Monetary Education Project at The definitive 
source for LETS information is Landsman Community Services, Ltd., 
1600 Embleton Crescent, Courtenay, British Columbia V9n 6N8, 
Canada; telephone (604) 338-0213. 

Limitations of Local Currency Systems 

Local exchange systems demonstrate that "money" need not be 
something that is scarce, or for which people have to compete. Money 
is simply credit. As Benjamin Franklin observed, credit turns prosperity 
tomorrow into ready money today. Credit can be had without gold, 
banks, governments or even printing presses. It can all be done on a 

The concept is good, but there are some practical limitations to 
the LETS model and other community currency systems as currently 
practiced. One is that the usual incentives for repayment are lacking. 
Interest is not charged, and there may be no time limit for repayment. 
If you have ever lent money to a relative, you know the problem. Debts 
can go unpaid indefinitely. You can lean on your relatives because 
you know where to find them; but in the anonymity of a city or a 
nation, borrowers on the honor system can just disappear into the 
night. Some alternatives for keeping community members honest have 
been suggested by Tom Greco, who writes: 

[T]here is always the possibility that a participant may choose 
to not honor his/her commitment, opting out of the system and 
refusing to deliver value equivalent to that received. There are 


Chapter 36 - The Community Currency Movement 

three possible ways, which occur to me, of handling that risk. 
The first possibility is to use a "funded" exchange in which each 
participant surrenders or pledges particular assets as security 
against his/her commitment. ... A second possibility, is to 
maintain an "insurance" pool, funded by fees levied on all 
transactions, to cover any possible losses. A third possibility . . . 
is reliance upon group co-responsibility, i.e. having each 
participant within an affinity group bear responsibility for the 
debits of the others. 7 

Those are possibilities, but they are not so practical or efficient as 
the contractual agreements used today, with interest charges and late 
penalties enforceable in court. Contracts to repay can be legally 
enforced by foreclosing on collateral, garnishing wages, and other 
remedies for breach of contract, with or without interest provisions. 
But interest penalties make borrowers more inclined to be prudent in 
their borrowing and to pay their debts promptly. Eliminating interest 
from the money system would eliminate the incentive for private 
lenders to lend and would encourage speculation. If credit were made 
available without time limits or interest charges, people might simply 
borrow all the free money they could get, then compete to purchase 
bonds, stocks, and other income-producing assets with it, generating 
speculative asset bubbles. Imposing a significant cost on borrowing 
deters this sort of rampant speculation. 

In Moslem communities, interest is avoided because usury is 
forbidden in the Koran. To avoid infringing religious law, Islamic 
lawyers have gone to great lengths to design contracts that avoid 
interest charges. The most common alternative is a contract in which 
the banker buys the property and sells it to the client at a higher price, 
to be paid in installments over time. The effect, however, is the same 
as charging interest: more money is owed back if the sum is paid over 
time than if it had been paid immediately. 

In large Western metropolises, where mobility is high and religion 
is not a pervasive factor, interest is considered a reasonable charge 
acknowledging the time value of money. The objection of Greco and 
others to charging interest turns on the "impossible contract" problem 
— the problem of finding principal and interest to pay back loans in a 
monetary scheme in which only the principal is put into the money 
supply — but that problem can be resolved in other ways. A proposal 
for retaining the benefits of the interest system while avoiding the 
"impossible contract" problem is explored in Chapter 42. A proposal 


Web of Debt 

for interest-free lending that might work is also described in that 

A more serious limitation of private "supplemental" currencies is 
that they fail to deal with the mammoth debt spider that is sucking 
the lifeblood from the national economy. "Supplemental" currencies 
all assume a national currency that is being supplemented. Taxes 
must still be paid in the national currency, and so must bills for tele- 
phone service, energy, gasoline, and anything else that isn't made by 
someone in the local currency group. That means community mem- 
bers must still belong to the national money system. As Stephen 
Zarlenga observes in The Lost Science of Money : 

[S]uch local currencies do not stop the continued mismanagement 
of the money system at the national level - they can't stop the 
continued dispensation of monetary injustice from above through 
the privately owned and controlled Federal Reserve money 
system. Ending that injustice should be our monetary priority? 

The national money problem can be solved only by reforming the 
national currency. And that brings us back to the "money question" of 
the 1890s - Greenbacks or gold? 


Chapter 37 


You shall not crucify mankind upon a cross of gold. 

— William Jennings Bryan, 1896 Democratic Convention 

t opposite ends of the debate over the money question in the 

1890s were the "Goldbugs," led by the bankers, and the 
"Greenbackers," who were chiefly farmers and laborers. 1 The use of 
the term "Goldbug" has been traced to the 1896 Presidential election, 
when supporters of gold money took to wearing lapel pins of small 
insects to show their position. The Greenbackers at the other extreme 
were suspicious of a money system dependent on the bankers' gold, 
having felt its crushing effects in their own lives. As Vernon Parrington 
summarized their position in the 1920s: 

To allow the bankers to erect a monetary system on gold is to 
subject the producer to the money-broker and measure deferred 
payments by a yardstick that lengthens or shortens from year to 
year. The only safe and rational currency is a national currency 
based on the national credit, sponsored by the state, flexible, 
and controlled in the interests of the people as a whole. 2 

The Goldbugs countered that currency backed only by the national 
credit was too easily inflated by unscrupulous politicians. Gold, they 
insisted, was the only stable medium of exchange. They called it 
"sound money" or "honest money." Gold had the weight of history 
to recommend it, having been used as money for 5,000 years. It had 
to be extracted from the earth under difficult and often dangerous 
circumstances, and the earth had only so much of it to relinquish. The 
supply of it was therefore relatively fixed. The virtue of gold was that 


Chapter 37 - The Money Question 

it was a rare commodity that could not be inflated by irresponsible 
governments out of all proportion to the supply of goods and services. 

The Greenbackers responded that gold's scarcity, far from being a 
virtue, was actually its major drawback as a medium of exchange. 
Gold coins might be "honest money," but their scarcity had led gov- 
ernments to condone dishonest money, the sleight of hand known as 
"fractional reserve" banking. Governments that were barred from 
creating their own paper money would just borrow it from banks that 
created it and then demanded it back with interest. As Stephen 
Zarlenga noted in The Lost Science of Money : 

[A] 11 of the plausible sounding gold standard theory could not 
change or hide the fact that, in order to function, the system 
had to mix paper credits with gold in domestic economies. Even 
after this addition, the mixed gold and credit standard could 
not properly service the growing economies. They periodically 
broke down with dire domestic and international results. [In] 
the worst such breakdown, the Great Crash and Depression of 
1929-33, ... it was widely noted that those countries did best 
that left the gold standard soonest. 3 

The reason gold has to be mixed with paper credits is evident from 
the math. As noted earlier, a dollar lent at 6 percent interest, com- 
pounded annually, becomes 10 dollars in 40 years. 4 That means that 
if the money supply were 100 percent gold, and if bankers lent out 10 
percent of it at 6 percent interest compounded annually (continually 
rolling over principal and interest into new loans), in 40 years the 
bankers would own all the gold. To avoid that result, either the money 
supply needs to be able to expand, which means allowing fiat money, 
or interest needs to be banned as it was in the Middle Ages. 

The debate between the Goldbugs and the Greenbackers still rages, 
but today the Goldbugs are not the bankers. Rather, they are in the 
money reform camp along with the Greenbackers. Both factions are 
opposed to the current banking system, but they disagree on how to 
fix it. That is one reason the modern money reform movement hasn't 
made much headway politically. As Machiavelli said in the sixteenth 
century, "He who introduces a new order of things has all those who 
profit from the old order as his enemies, and he has only lukewarm 
allies in all those who might profit from the new." Maverick reformers 
continue to argue among themselves while the bankers and their hired 
economists march in lockstep, fortified by media they have purchased 
and laws they have gotten passed with the powerful leverage of their 
bank-created money. 


Web of Debt 

Is Gold a Stable Measure of Value? 

There is little debate that gold is an excellent investment, 
particularly in times of economic turmoil. When the Argentine peso 
collapsed, families with a stash of gold coins reported that one coin 
was sufficient to make it through a month on the barter system. Gold 
is a good thing to own, but the issue debated by money reformers is 
something else: should it be the basis of the national currency, either 
alone or as "backing" for paper and electronic money? 

Goldbugs maintain that a gold currency is necessary to keep the 
value of money stable. Greenbackers agree on the need for stability 
but question whether the price of gold is stable enough to act as such 
a peg. In the nineteenth century, farmers knew the problem first- 
hand, having seen their profits shrink as the gold price went up. A 
real-world model is hard to come by today, but one is furnished by the 
real estate market in Vietnam, where sales have recently been under- 
taken in gold. In the fall of 2005, the price of gold soared to over $500 
an ounce. When buyers suddenly had to pay tens of millions more 
Vietnamese dotig for a house valued at 1,000 taels of gold, the real 
estate market ground to a halt. 5 

The purpose of "money" is to tally the value of goods and services 
traded, facilitating commerce between buyers and sellers. If the yard- 
stick by which value is tallied keeps stretching and shrinking itself, 
commerce is impaired. When gold was the medium of exchange his- 
torically, prices inflated along with the supply of gold. When gold 
from the New World flooded Spain in the sixteenth century, the coun- 
try suffered massive inflation. During the California Gold Rush of the 
1850s, consumer prices also shot up with the rising supply of gold. 
From 1917 to 1920, the U.S. gold supply surged again, as gold came 
pouring into the country in exchange for war materials. The money 
supply became seriously inflated and consumer prices doubled, al- 
though the money supply was supposedly being strictly regulated by 
the Federal Reserve. 6 During the 1970s, the value of gold soared from 
$40 an ounce to $800 an ounce, dropping back to a low of $255 in 
February 2001. (See Chart, page 346.) If rents had been paid in gold 
coins, they would have swung wildly as well. Again, people on fixed 
incomes generally prefer a currency that has a fixed and predictable 
value, even if it exists only as numbers in their checkbooks. 

The tether of gold can serve to curb inflation, but an expandable 
currency is necessary to avert the depressions that pose even graver 


Chapter 37 - The Money Question 

dangers to the economy. When the money supply contracts, so do 
productivity and employment. When gold flooded the market after a 
major gold discovery in the nineteenth century, there was plenty of 
money to hire workers, so production and employment went up. 
When gold became scarce, as when the bankers raised interest rates 
and called in loans, there was insufficient money to hire workers, so 
production and employment went down. But what did the availability 
of gold have to do with the ability of farmers to farm, of miners to 
mine, of builders to build? Not much. The Greenbackers argued that 
the work should come first. Like in the medieval tally system, the 
"money" would follow, as a receipt acknowledging payment. 

Goldbugs argue that there will always be enough gold in a gold- 
based money system to go around, because prices will naturally adjust 
downward so that supply matches demand. 7 But this fundamental 
principle of the quantity theory of money has not worked well in 
practice. The drawbacks of limiting the medium of exchange to 
precious metals were obvious as soon as the Founding Fathers decided 
on a precious metal standard at the Constitutional Convention, when 
the money supply contracted so sharply that farmers rioted in the 
streets in Shay's Rebellion. When the money supply contracted during 
the Great Depression, a vicious deflationary spiral was initiated. 
Insufficient money to pay workers led to demand falling off, which 
led to more goods remaining unsold, which caused even more workers 
to get laid off. Fruit was left to rot in the fields, because it wasn't 
economical to pick it and sell it. 

To further clarify these points, here is a hypothetical. You are 
shipwrecked on a desert island .... 

Shipwrecked with a Chest of Gold Coins 

You and nine of your mates wash ashore with a treasure chest 
containing 100 gold coins. You decide to divide the coins and the 
essential tasks equally among you. Your task is making the baskets 
used for collecting fruit. You are new to the task and manage to turn 
out only ten baskets the first month. You keep one and sell the others 
to your friends for one coin each, using your own coins to purchase 
the wares of the others. 

So far so good. By the second month, your baskets have worn out 
but you have gotten much more proficient at making them. You 
manage to make twenty. Your mates admire your baskets and say 


Web of Debt 

they would like to have two each; but alas, they have only one coin to 
allot to basket purchase. You must either cut your sales price in half 
or cut back on production. The other islanders face the same problem 
with their production potential. The net result is price deflation and 
depression. You have no incentive to increase your production, and 
you have no way to earn extra coins so that you can better your standard 
of living. 

The situation gets worse over the years, as the islanders multiply 
but the gold coins don't. You can't afford to feed your young children 
on the meager income you get from your baskets. If you make more 
baskets, their price just gets depressed and you are left with the num- 
ber of coins you had to start with. You try borrowing from a friend, 
but he too needs his coins and will agree only if you will agree to pay 
him interest. Where is this interest to come from? There are not enough 
coins in the community to cover this new cost. 

Then, miraculously, another ship washes ashore, containing a chest 
with 50 more gold coins. The lone survivor from this ship agrees to 
lend 40 of his coins at 20 percent interest. The islanders consider this 
a great blessing, until the time comes to pay the debt back, when they 
realize there are no extra coins on the island to cover the interest. The 
creditor demands lifetime servitude instead. The system degenerates 
into debt and bankruptcy, just as the gold-based system did historically 
in the outside world. 

Now consider another scenario .... 

Shipwrecked with an Accountant 

You and nine companions are shipwrecked on a desert island, but 
your ship is not blessed (or cursed) with a chest of gold coins. "No 
problem," says one of your mates, who happens to be an accountant. 
He will keep "count" of your productivity with notched wooden tal- 
lies. He assumes the general function of tally-maker and collector and 
distributor of wares. For this service he pays himself a fair starting 
wage of ten tallies a month. 

Your task is again basket-weaving. The first month, you make ten 
baskets, keep one, and trade the rest with the accountant for nine 
tallies, which you use to purchase the work/product of your mates. 
The second month, you make twenty baskets, keep two, and request 
eighteen tallies from the accountant for the other baskets. This time 
you get your price, since the accountant has an unlimited supply of 
trees and can make as many tallies as needed. They have no real 


Chapter 37 - The Money Question 

value in themselves and cannot become "scarce." They are just re- 
ceipts, a measure of the goods and services on the market. By collect- 
ing eighteen tallies for eighteen baskets, you have kept your basket's 
price stable, and you now have some extra money to tuck under your 
straw mattress for a rainy day. You take a month off to explore the 
island, funding the vacation with your savings. 

When you need extra tallies to build a larger house, you borrow 
them from the accountant, who tallies the debt with an accounting 
entry. You pay principal and interest on this loan by increasing your 
basket production and trading the additional baskets for additional 
tallies. Who pockets the interest? The community decides that it is 
not something the tally-maker is rightfully entitled to, since the credit 
he extended was not his own but was an asset of the community, and 
he is already getting paid for his labor. The interest, you decide as a 
group, will be used to pay for services needed by the community — 
clearing roads, standing guard against wild animals, caring for those 
who can't work, and so forth. Rather than being siphoned off by a 
private lender, the interest goes back into the community, where it 
can be used to pay the interest on other loans. 

When you and your chosen mate are fruitful and multiply, your 
children make additional baskets, and your family's wealth also 
multiplies. There is no shortage of tallies, since they are pegged to the 
available goods and services. They multiply along with this "real" 
wealth; but they don't inflate beyond real wealth, because tallies and 
"wealth" (goods and services) always come into existence at the same 
time. When you are comfortable with your level of production — 
say, twenty baskets a month — no new tallies are necessary to fund 
your business. The system already contains the twenty tallies needed 
to cover basket output. You receive them in payment for your baskets 
and spend them on the wares of the other islanders, keeping the tallies 
in circulation. The money supply is permanent but expandable, 
growing as needed to cover real growth in productivity and the interest 
due on loans. Excess growth is avoided by returning money to the 
community, either as interest due on loans or as a fee or tax for other 
services furnished to the community. 


Web of Debt 

Where Would the Government Get the Gold? 

Other challenges would face a government that tried to switch to 
an all-gold currency, and one challenge would appear to be 
insurmountable: where would the government get the gold? The 
metal would have to be purchased, and what would the government 
use to purchase it with if Federal Reserve Notes were no longer legal 
tender? In the worst-case scenario, the government might simply 
confiscate the gold of its citizens, as Roosevelt did in 1933; but when 
Roosevelt did it, he at least had some money to pay for it with. If gold 
were the only legal tender, Federal Reserve Notes would be worthless. 

Assume for purposes of argument, however, that the Treasury 
did manage to acquire a suitable stash of gold. All of the above-ground 
gold in the world is estimated at less than 6 billion ounces (or about 
160,000 UK tonnes), and much of it is worn around the necks of 
women in Asia, so acquiring all 6 billion ounces would obviously be 
impossible; but let's assume that the U.S. government succeeded in 
acquiring half of it. At $800 per ounce (the December 2007 price), 
that would be around $2.4 trillion worth of gold. If all 12 trillion 
dollars in the money supply (M3) were replaced with gold, one troy 
ounce would have a value of about $4,000, or 5 times its actual market 
value in 2007. That means the value of a gold coin would no longer 
bear any real relationship to "market" conditions, so how would this 
laborious exercise contribute to price stability? If the goal is to maintain 
a fixed money supply, why not just order the Treasury to issue a fixed 
number of tokens, declare them to be the sole official national legal 
tender, and refuse to issue any more? The government could do that; 
but again, do we want a fixed, non-inflatable money supply? As long 
as money is lent at compound interest, keeping the money supply 
"fixed and stable" means the lenders will eventually wind up with all 
the gold. 

Some gold proponents have proposed a dual-currency system. (See 
Chapter 35.) The fiat system would continue, but prudent people 
could convert their funds to gold coins or E-gold for private trade. 
The idea would be to preserve the value of their money as the value of 
the fiat dollar plunged, but what would be the advantage of trading 
in a gold currency if the fiat system were still in place? Why not just 
buy gold as an investment and watch its value go up as the dollar's 
value shrinks? The gold could be sold in the market for fiat dollars as 
needed. Again, you can capitalize on gold's investment value without 
having to use it as a currency. 


Chapter 37 - The Money Question 

The "Real Bills" Doctrine 

If using gold as a currency is plagued with so many problems, 
why did it work reasonably well up until World War I? Nelson 
Hultberg and Antal Fekete argue that gold was able to function as a 
currency because it was supplemented with a private money system 
called "real bills" - short-term bills of exchange that traded among 
merchants as if they were money. Real bills were invoices for goods 
and services that were passed from hand to hand until they came 
due, serving as a secondary form of money that was independent of 
the banks and allowed the money supply to expand without losing its 
value. 8 

The "real bills" doctrine was postulated by Adam Smith in The 
Wealth of Nations in 1776. It held that so long as money is issued 
only for assets of equal value, the money will maintain its value no 
matter how much money is issued. If the issuer takes in $100 worth 
of silver and issues $100 worth of paper money in exchange, the money 
will obviously hold its value, since it can be cashed in for the silver. 
Likewise, if the issuer takes I.O.U.s for $100 worth of corn in the future 
and issues $100 worth of paper money in exchange, the money will 
hold its value, since the issuer can sell the corn in the market and get 
the money back. Similarly, if the issuer takes a mortgage on a gambler's 
house in exchange for issuing $100 and lending it to the gambler, the 
money will hold its value even if the gambler loses the money in the 
market, since the issuer can sell the house and get the money back. 
The real bills doctrine was rejected by twentieth century economists 
in favor of the quantity theory of money; but Wikipedia notes that it is 
actually the basis on which the Federal Reserve advances credit today, 
when it takes mortgage-backed loans as collateral and then 
"monetizes" them by advancing an equivalent sum in accounting- 
entry dollars to the borrowing bank. 9 

Professor Fekete states that the real bills system works to preserve 
monetary value only when there is gold to be collected at the end of 
the exchange, but other commodities would obviously work as well. 
One alternative that has been proposed is the "Kilowatt Card," a 
privately-issued paper currency that can be traded as money or cashed 
in for units of electricity. 10 The nineteenth century Greenbackers relied 
on the real bills doctrine when they contended that the money supply 
would retain its value if the government issued paper dollars in 

exchange for labor that produced an equivalent value in goods and 


Web of Debt 

services. The Greenback was a receipt for a quantity of goods or services 
delivered to the government, which the bearer could then trade in the 
community for other goods or services of equivalent value. The receipt 
was simply a tally, an accounting tool for measuring value. The gold 
certificate itself could be considered just one of many forms of "real 
bills." It has value because it has been issued or traded for real goods, 
in this case gold. Some alternatives for pegging currencies to a 
standard of value that includes many goods and services rather than 
a single volatile precious metal are discussed in Chapter 46. 

The NES ARA Bill: Restoring Constitutional Money 

One other proposal should be explored before leaving this chapter. 
Harvey Barnard of the NESARA Institute in Louisiana has suggested 
a way to retain the silver and gold coinage prescribed in the Constitution 
while providing the flexibility needed for national growth and 
productivity. The Constitution gives Congress the exclusive power 
"to coin Money, regulate the Value thereof, and of foreign Coin, and 
fix the Standard of Weights and Measures." Under Barnard's bill, 
called the National Economic Stabilization and Recovery Act 
(NESARA'), the national currency would be issued exclusively by the 
government and would be of three types: standard silver coins, 
standard gold coins, and Treasury credit-notes (Greenbacks). The 
Treasury notes would replace all debt-money (Federal Reserve Notes). 
The precious metal content of coins would be standardized as provided 
in the Constitution and in the Coinage Act of 1792, which make the 
silver dollar coin the standard unit of the domestic monetary system. 
To prevent coins from being smelted for their metal content, the coins 
would not be stamped with a face value but would just be named 
"silver dollars," "gold eagles," or fractions of those coins. Their values 
would then be left to float in relation to the Treasury credit-note and 
to each other. Exchange rates would be published regularly and would 
follow global market values. Congress would not only mint coins from 
its own stores of gold and silver but would encourage people to bring 
their private stores to be minted and circulated. Other features of the 
bill include abolition of the Federal Reserve System, purchase by the 
U.S. Treasury of all outstanding capital stock of the Federal Reserve 

i Not to be confused with the " National Economic Security and Reformation 
Act" (NESARA), a later, more controversial proposal said to have been channeled. 


Chapter 37 - The Money Question 

Banks, return of the national currency to the public through a newly- 
created U.S. Treasury Reserve System, and replacement of the federal 
income tax system with a 14 percent sales and use tax (exempting 
specified items including groceries and rents). 11 

The NESARA proposal might work, but if the government can 
issue both paper money and precious metal coins, the coins won't serve 
as much of a brake on inflation. So why go to the trouble of minting 
them, or to the inconvenience of carrying them around? The problem 
with the current financial scheme is not that the dollar is not redeemable 
in gold. It is that the whole monetary edifice is a pyramid scheme 
based on debt to a private banking cartel. Money created privately as 
multiple "loans" against a single "reserve" is fraudulent on its face, 
whether the "reserve" is a government bond or gold bullion. 

Precious metals are an excellent investment to preserve value in 
the event of economic collapse, and community currencies are viable 
alternative money sources when other money is not to be had. But in 
the happier ending to our economic fairytale, the national money supply 
would be salvaged before it collapses; and what is threatening to collapse 
the dollar today is not that it is not backed by gold. It is that 99 percent 
of the U.S. money supply is owed back to private lenders with interest, 
and the money to cover the interest does not exist until new loans are 
taken out to cover it. Just to maintain our debt-based money supply 
requires increasing levels of debt and corresponding levels of inflation, 
creating a debt cyclone that is vacuuming up our national assets. The 
federal debt has grown so massive that the interest burden alone will 
soon be more than the taxpayers can afford to pay. The debt is 
impossible to repay in the pre-Copernican world in which money is 
lent into existence by private banks, but the Wizard of Oz might have 
said we have just been looking at the matter wrong. We have allowed 
our money to rotate in the firmament around an elite class of financiers 
when it should be rotating around the collective body of the people. 
When that Copernican shift is made, the water of a free-flowing money 
supply can transform the arid desert of debt into the green abundance 
envisioned by our forefathers. We can have all the abundance we need 
without taxes or debt. We can have it just by eliminating the financial 
parasite that is draining our abundance away. 


Chapter 38 

"As for you my fine friend, you're a victim of disorganized 
thinking. You are under the unfortunate delusion that simply 
because you have run away from danger, you have no courage. You 
are confusing courage with wisdom." 

- The Wizard ofOz to the Lion 

The Wizard of Oz solved impossible problems just by look- 
ing at them differently. The Wizard showed the Cowardly 
Lion that he had courage all along, showed the Scarecrow that he 
had a brain all along, showed the Tin Woodman that he had a heart 
all along. If the Kingdom of Oz had had a Congress, the Wizard 
might have shown it that it had the means to pay off its national debt 
all along. It could pay off the debt by turning its bonds into what they 
should have been all along - legal tender. 

Indeed, the day is fast approaching when the U.S. Congress may 
have no other alternative but to pay off its debt in this way. The 
federal debt has reached crisis proportions. U.S. Comptroller General 
David M. Walker warned in September 2003: 

We cannot simply grow our way out of [the national debt]. . . . 
The ultimate alternatives to definitive and timely action are not 
only unattractive, they are arguably infeasible. Specifically, 
raising taxes to levels far in excess of what the American people 
have ever supported before, cutting total spending by 
unthinkable amounts, or further mortgaging the future of our 
children and grandchildren to an extent that our economy, our 
competitive posture and the quality of life for Americans would 
be seriously threatened. 1 


Chapter 38 - The Federal Debt 

U.S. Debt 1950-2004 
Excel Growth Trend Projection 2005-2015 












- - -n- - -n- - - n- - 11T 'llH 


1950 1960 1970 1980 1990 2000 


In the 1930s, economist Alvin Hansen told President Roosevelt that 
plunging the country into debt did not matter, because the public debt 
was owed to the people themselves and never had to be paid back. 
But even if that were true in the 1930s (which is highly debatable), it is 
clearly not true today. Nearly half the public portion of the federal 
debt is now owed to foreign investors, who are not likely to be so 
sanguine about continually refinancing it, particularly when the dollar 
is rapidly shrinking in value. Al Martin cites a study authorized by 
the U.S. Treasury in 2001, finding that for the government to keep 
servicing its debt as it has been doing, by 2013 it will have to have 
raised the personal income tax rate to 65 percent. And that's just to 
pay the interest on the national debt. When the government can't pay 
the interest, it will be forced to declare bankruptcy, and the economy 
will collapse. Martin writes: 

The economy of the rest of the planet would collapse five days 
later. . . . The only way the government can maintain control in 
a post-economically collapsed environment is through currency 
and through military might, or internal military power. . . . And 
that's what U.S. citizens are left with . . . super sized bubbles 
and really scary economic numbers. 2 


Web of Debt 

Federal Government Debt 
per Person 

(exclude state & local government debt) 

Grandfather Economic Report: 
http /Anwhodges .home 
data: Dept. of Debt, U.S. Treasury 

Compounding the problem, Iran and other oil producers are now 
moving from dollars to other currencies for their oil trades. If oil no 
longer has to be traded in dollars, a major incentive for foreign central 
banks to hold U.S. government bonds will disappear. British journalist 
John Pilger, writing in The New Statesman in February 2006, suggested 
that the real reason for the aggressive saber-rattling with Iran is not 
Iran's nuclear ambitions but is the effect of the world's fourth-biggest 
oil producer and trader breaking the dollar monopoly. He noted that 
Iraqi President Saddam Hussein had done the same thing before he 
was attacked. 3 In an April 2005 article in Counter Punch, Mike 
Whitney warned of the dire consequences that are liable to follow 
when the "petrodollar" standard is abandoned: 

This is much more serious than a simple decline in the value of 
the dollar. If the major oil producers convert from the dollar to 
the euro, the American economy will sink almost overnight. If 
oil is traded in euros then central banks around the world would 
be compelled to follow and America will be required to pay off its 
enormous $8 trillion debt. That, of course, would be doomsday 
for the American economy. ... If there's a quick fix, I have no 
idea what it might be. 4 


Chapter 38 - The Federal Debt 

The quick fix! It was the Wizard's stock in trade. He might have 
suggested fixing the problem by changing the rules by which the game 
is played. In 1933, Franklin Roosevelt pronounced the country officially 
bankrupt, exercised his special emergency powers, waved the royal 
Presidential fiat, and ordered the promise to pay in gold removed from 
the dollar bill. The dollar was instantly transformed from a promise 
to pay in legal tender into legal tender itself. Seventy years later, 
Congress could again acknowledge that the country is officially 
bankrupt, propose a plan of reorganization, and turn its debts into 
"legal tender." Alexander Hamilton showed two centuries ago that 
Congress could dispose of the federal debt by "monetizing" it, but 
Congress made the mistake of delegating that function to a private 
banking system. Congress just needs to rectify its error and monetize 
the debt itself, by buying back its own bonds with newly-issued U.S. 

If that sounds like a radical solution, consider that it is actually 
what is being done right now — not by the government but by the private 
Federal Reserve. The difference is that when the Fed buys back the 
government's bonds with newly-issued Federal Reserve Notes, it 
doesn't take the bonds out of circulation. Two sets of securities (the 
bonds and the cash) are produced where before there was only one. 
This highly inflationary result could be avoided by allowing the 
government to buy back its own bonds and simply voiding them out. 
(More on this in Chapter 39.) 

The Mysterious Pirates of the Caribbean 

"Monetizing" the government's debt by buying federal securities 
with newly-issued cash is nothing new. The practice has been quietly 
engaged in by the Fed and its affiliated banks for the last century. In 
2005, however, this scheme evidently went into high gear, when China 
and Japan, the two largest purchasers of U.S. federal debt, cut back 
on their purchases of U.S. securities. Market "bears" had long warned 
that when foreign creditors quit rolling over their U.S. bonds, the U.S. 
economy would collapse. They were therefore predicting the worst; 
but somehow, no disaster resulted. The bonds were still getting sold. 
The question was, to whom? The Fed identified the buyers as a 
mysterious new U.S. creditor group called "Caribbean banks." The 

1 An allusion to John Snow, then U.S. Treasury Secretary. 

Web of Debt 

financial press said they were offshore hedge funds. But Canadian 
analyst Rob Kirby, writing in March 2005, said that if they were hedge 
funds, they must have performed extremely poorly for their investors, 
raking in losses of 40 percent in January 2005 alone; and no such losses 
were reported by the hedge fund community. He wrote: 

The foregoing suggests that hedge funds categorically did not buy 
these securities. The explanations being offered up as plausible 
by officialdom and fed to us by the main stream financial press 
are not consistent with empirical facts or market observations. 
There are no wide spread or significant losses being reported by 
the hedge fund community from ill gotten losses in the Treasury 
market. . . . [W]ho else in the world has pockets that deep, to 
buy 23 billion bucks worth of securities in a single month? One 
might surmise that a printing press would be required to come 
up with that kind of cash on such short notice .... [M]y 
suggestion ... is that history is indeed repeating itself and maybe 
Pirates still inhabit the Caribbean. Perhaps they are aided and 
abetted in their modern day financial piracy by Wizards and 
Snowmen 1 with printing presses, who reside in Washington. 5 

In September 2005, this bit of wizardry happened again, after 
Venezuela liquidated roughly $20 billion in U.S. Treasury securities 
following U.S. threats to Venezuela. Again the anticipated response 
was a plunge in the dollar, and again no disaster ensued. Other buyers 
had stepped in to take up the slack, and chief among them were the 
mysterious "Caribbean banking centers." Rob Kirby wrote: 

I wonder who really bought Venezuela's 20 or so billion they 
"pitched." Whoever it was, perhaps their last name ends with 
Snow or Greenspan. . . . [T]here are more ways than one might 
suspect to create the myth (or reality) of a strong currency - at 
least temporarily! 6 

Those incidents may just have been dress rehearsals for bigger 
things to come. When the Fed announced that it would no longer be 
publishing figures for M3 beginning in March 2006, analysts wondered 
what it was we weren't supposed to know. March 2006 was the 
month Iran announced that it would begin selling oil in Euros. Some 
observers suspected that the Fed was gearing up to use newly-printed 
dollars to buy back a flood of U.S. securities dumped by foreign central 
banks. Another possibility was that the Fed had already been engaging 
in massive dollar printing to conceal a major derivatives default and 


Chapter 38 - The Federal Debt 

was hiding the evidence. 7 

Whatever the answer, the question raised here is this: if the Fed 
can buy back the government's bonds with a flood of newly-printed 
dollars, leaving the government in debt to the Fed and the banks, why 
can't the government buy back the bonds with its own newly-printed 
dollars, debt-free? The inflation argument long used to block that 
solution simply won't hold up anymore. But before we get to that 
issue, we'll look at just how easily this reverse sleight of hand might be 
pulled off, without burying the government in paperwork or violating 
the Constitution .... 

Extinguishing the National Debt 
with the Click of a Mouse 

In the 1980s, a chairman of the Coinage Subcommittee of the U.S. 
House of Representatives pointed out that the national debt could be 
paid with a single coin. The Constitution gives Congress the power to 
coin money and regulate its value, and no limitation is put on the 
value of the coins it creates. 8 The entire national debt could be extinguished 
with a single coin minted by the U.S. Mint, stamped with the appropriate 
face value. Today this official might have suggested nine coins, each 
with a face value of one trillion dollars. 

One problem with that clever solution is, how do you make change 
for a trillion dollar coin? The value of this mega-coin would obviously 
derive, not from its metal content, but simply from the numerical value 
stamped on it. If the government can stamp a piece of metal and call 
it a trillion dollars, it should be able to create paper money or digital 
money and call it the same thing. As Andrew Jackson observed, when 
the Founding Fathers gave Congress the power to "coin" money, they 
did not mean to limit Congress to metal money and let the banks create 
the rest. They meant to give the power to create the entire national 
money supply to Congress. Jefferson said that Constitutions needed 
to be amended to suit the times; and today the "coin" of the times is 
paper money, checkbook money, and electronic money. The 
Constitutional provision that gives Congress "the power to coin money" 
needs to be updated to read "the power to create the national money 
supply in all its forms." 

If that modification were made, most of the government's debt could 
be paid online. The simplicity of the procedure was demonstrated by 
the U.S. Treasury itself in January 2004, when it "called" (or redeemed) 


Web of Debt 

a 30-year bond issue before the bond was due. The Treasury 
announced on January 15, 2004: 


The Treasury today announced the call for redemption at 
par on May 15, 2004, of the 9-1/8% Treasury Bonds of 2004-09, 
originally issued May 15, 1979, due May 15, 2009 (CUSIP No. 
9112810CG1). There are $4,606 million of these bonds 
outstanding, of which $3,109 million are held by private 
investors. Securities not redeemed on May 15, 2004 will stop 
earning interest. 

These bonds are being called to reduce the cost of debt 
financing. The 9-1/8% interest rate is significantly above the 
current cost of securing financing for the five years remaining to 
their maturity. In current market conditions, Treasury estimates 
that interest savings from the call and refinancing will be about 
$544 million. 

Payment will be made automatically by the Treasury for bonds in 
book-entry form, whether held on the books of the Federal Reserve 
Banks or in TreasuryDirect accounts. 9 

The provision for payment "in book entry form" meant that no 
dollar bills, checks or other paper currencies would be exchanged. 
Numbers would just be entered into the Treasury's direct online money 
market fund ("TreasuryDirect"). The securities would merely change 
character - from interest-bearing to non-interest-bearing, from a debt 
owed to a debt paid. Bondholders failing to redeem their securities by 
May 15, 2004 could still collect the face amount of the bonds in cash. 
They would just not receive interest on the bonds. 

The Treasury's announcement generated some controversy, since 
government bonds are usually considered good until maturity; but 
early redemption was actually allowed in the fine print on the bonds. 10 
Provisions for early redemption are routinely written into corporate 
and municipal bonds, so that when interest rates drop, the issuer can 
refinance the debt at a lower rate. 

How did the Treasury plan to refinance this $4 billion bond issue 
at a lower rate? Any bonds not bought by the public would no doubt 
be bought by the banks. Recall the testimony of Federal Reserve Board 
Chairman Marriner Eccles: 

When the banks buy a billion dollars of Government bonds as 
they are offered . . . they actually create, by a bookkeeping entry, a 
billion dollars. 11 


Chapter 38 - The Federal Debt 

If the Treasury can cancel its promise to pay interest on a bond 
issue simply by announcing its intention to do so, and if it can refinance 
the principal with bookkeeping entries, it can pay off the entire federal 
debt in that way. It just has to announce that it is calling its bonds and 
other securities, and that they will be paid "in book-entry form." No 
cash needs to change hands. The funds can remain in the accounts 
where the bonds were held, to be reinvested somewhere else. 

Indeed, at this point the only way to fend off national bankruptcy 
may be for the government to simply issue fiat money, buy back its 
own bonds, and void them out. That is the conclusion of Goldbug 
leader Ed Griffin in The Creature from Tekyll Island, as well as of 
Greenbacker leader Stephen Zarlenga in model legislation called the 
American Monetary Act. 12 Zarlenga notes that the federal debt needn't 
be paid off all at once. The government's debts extend several decades 
into the future and could be paid gradually as the securities came due. 
Other provisions of the American Monetary Act are discussed in 
Chapter 41. 


Chapter 39 

The national debt . . . answers most of the purposes of money. 

— Alexander HamUton, "Report on the Public Credit, " 
January 14, 1790 

The idea that the federal debt could be liquidated by simply 
printing up money and buying back the government's bonds 
with it is dismissed out of hand by economists and politicians, on the 
ground that it would produce Weimar-style runaway inflation. But 
would it? Inflation results when the money supply increases faster 
than goods and services, and replacing government securities with cash 
would not change the size of the money supply. Federal securities have 
been traded as part of the money supply ever since Alexander Hamilton 
made them the basis of the U.S. money supply in the late eighteenth 
century. Federal securities are treated by the Fed and by the market 
itself just as if they were money. They are traded daily in enormous 
volume among banks and other financial institutions around the world 
just as if they were money. 1 If the government were to buy back its 
own securities with cash, these instruments representing financial value 
would merely be converted from interest-bearing into non-interest- 
bearing financial assets. The funds would move from M2 and M3 into 
Ml (cash and checks), but the total money supply would remain the 

That would be true if the government were to buy back its securities 
with cash, but that is very different from what is happening today. When 
the Federal Reserve uses newly-issued Federal Reserve Notes to buy 
back federal bonds, it does not void out the bonds. Rather, they become 


Chapter 39 - Liquidating the Federal Debt 

the "reserves" for issuing many times their value in new loans; and 
the new cash created to buy these securities is added to the money 
supply as well. That highly inflationary result could be avoided if the 
government were to buy back its own bonds and take them out of 

In Today's Illusory Financial Scheme, Debt Is Money 

"Money" has been variously defined as "a medium that can be 
exchanged for goods and services," and "assets and property 
considered in terms of monetary value; wealth." What falls under 
those definitions, however, keeps changing. In a November 2005 article 
titled "M3 Measure of Money Discontinued by the Fed," Bud Conrad 

Money used to mean the cash people carried in their pockets 
and the checking and savings account balances they had in their 
banks, because that is what they would use to buy goods. But 
now they have money market funds, which function almost as 
checking accounts. And behind many small-balance checking 
accounts are large lines of credit. . . . [C]redit is what we use to 
buy things so credit is a form of money. The broadest definition of 
credit is all debt. 2 

"All debt" includes the federal debt, which is composed of securities 
(bills, bonds and notes). If the government were to swap its securities 
for cash and take them out of circulation, price inflation would not 
result, because no one would have any more money to spend than before. 
The government's bond money would already have been spent — it 
wouldn't get any more money out of the deal — and the cashed-out 
bondholders would not be any richer either. Consider this hypothetical: 

You have $20,000 that you want to save for a rainy day. You 
deposit the money in an account with your broker, who recommends 
putting $10,000 into the stock market and $10,000 into corporate 
bonds, and you agree. How much do you think you have saved in the 
account? $20,000. A short time later, your broker notifies you that 
your bonds have been unexpectedly called, or turned into cash. You 
check your account on the Internet and see that where before it 
contained $10,000 in corporate bonds, it now contains $10,000 in cash. 
How much do you now think you have saved in the account? $20,000 
(plus or minus some growth in interest and fluctuations in stock values). 


Web of Debt 

Paying off the bonds did not give you an additional $10,000, making 
you feel richer than before, prompting you to rush out to buy shoes or 
real estate you did not think you could afford before, increasing demand 
and driving up prices. 

This result is particularly obvious when we look at the largest hold- 
ers of federal securities, including Social Security and other institu- 
tional investors .... 

Solving the Social Security Crisis 

In March 2005, the federal debt clocked in at $7,713 trillion. Of 
that sum, $3,169 trillion, or 41 percent, was in "intragovernmental 
holdings" - government trust funds, revolving funds, and special funds. 
Chief among them was the Social Security trust fund, which held 
$1,705 trillion of the government's debt. The 59 percent owned by the 
public was also held largely by institutional investors - U.S. and for- 
eign banks, investment funds, and so forth. 3 

Dire warnings ensued that Social Security was going bankrupt, 
since its holdings were invested in federal securities that the government 
could not afford to redeem. Defenders of the system countered that 
Social Security could not actually go bankrupt, because it is a pay-as- 
you-go system. Today's retirees are paid with withdrawals from the 
paychecks of today's working people. It is only the fund's excess 
holdings that are at risk; and it is the government, not Social Security, 
that is teetering on bankruptcy, because it is the government that lacks 
the money to pay off its bonds. 4 

The issue here, however, is what would happen if the Social 
Security crisis were resolved by simply cashing out its federal bond 
holdings with newly-issued U.S. Notes? Would dangerous inflation 
result? The likely answer is that it would not, because the Social 
Security fund would have no more money than it had before. The 
government would just be returning to the fund what the taxpayers 
thought was in it all along. The bonds would be turned into cash, 
which would stay in the fund where it belonged, to be used for future 
baby-boomer pay-outs as intended. 


Chapter 39 - Liquidating the Federal Debt 

Cashing Out the Federal Securities of the Federal Reserve 

Another institution holding a major chunk of the federal debt is 
the Federal Reserve itself. The Fed owns about ten percent of the 
government's outstanding securities. 5 If the government were to buy 
back these securities with cash, that money too would no doubt stay 
where it is, where it would continue to serve as the reserves against 
which loans were made. The cash would just replace the bonds, which 
would be liquidated and taken out of circulation. Again, consumer 
prices would not go up, because there would be no more money in 
circulation than there was before. 

That is one way to deal with the Federal Reserve's Treasury 
securities, but an even neater solution has been proposed: the 
government could just void out the bonds. Recall that the Federal 
Reserve acquired its government securities without consideration, and 
that a contract without consideration is void. (See Chapter 2.) 

What would the Federal Reserve use in that case for reserves? 
Article 30 of the Federal Reserve Act of 1913 gave Congress the right 
to rescind or alter the Act at any time. If the Act were modified to 
make the Federal Reserve a truly federal agency, it would not need to 
keep reserves. It could issue "the full faith and credit of the United 
States" directly, without having to back its dollars with government 
bonds. (More on this in Chapter 41.) 

Cashing Out the Holdings of Foreign Central Banks 

Other major institutional holders of U.S. government debt are 
foreign central banks. At the end of 2004, foreign holdings of U.S. 
Treasury debt came to about $1.9 trillion, roughly comparable to the 
$1.7 trillion held in the Social Security trust fund. Of that sum, foreign 
central banks owned 64 percent, or $1.2 trillion. 6 

What would cashing out those securities do to the money supply? 
Again, probably not much. Foreign central banks have no use for 
consumer goods, and they do not invest in real estate. They keep U.S. 
dollars in reserve to support their own currencies in global markets 
and to have the dollars available to buy oil as required under a 1974 
agreement with OPEC. They keep dollars in reserve either as cash or 
as U.S. securities. Holding U.S. securities is considered to be the 
equivalent of holding dollars that pay interest. 7 If these securities were 
turned into cash, the banks would probably just keep the cash in 


Web of Debt 

reserve in place of the bonds - and count themselves lucky to have 
their dollars back, on what is turning out to be a rather risky investment. 
Fears have been voiced that the U.S. government may soon be unable 
to pay even the interest on the federal debt. When that happens, the 
U.S. can either declare bankruptcy and walk away, or it can buy back 
the bonds with newly-issued fiat money. Given the choice, foreign 
investors would probably be happy to accept the fiat money, which 
they could spend on real goods and services in the economy. And if 
they complained, the U.S. government could argue that turnabout is 
fair play. John Succo is a hedge fund manager who writes on the 
Internet as "Mr. Practical." He estimates that as much as 90 percent 
of foreign money used to buy U.S. securities comes from foreign central 
banks, which print their own local currencies, buy U.S. dollars with 
them, and then use the dollars to buy U.S. securities. 8 The U.S. 
government would just be giving them their fiat currency back. 

Market commentators worry that as foreign central banks cash in 
their U.S. securities, U.S. dollars will come flooding back into U.S. 
markets, hyperinflating the money supply and driving up consumer 
prices. But we've seen that this predicted result has not materialized 
in China, although foreign money has been flooding its economy for 
thousands of years. American factories and industries are now laying 
off workers because they lack customers. A return of U.S. dollars to 
U.S. shores could prime the pump, giving lagging American industries 
the boost they need to again become competitive with the rest of the 
world. We are continually being urged to "shop" for the good of the 
economy. What would be so bad about having our dollars returned 
to us by some foreigners who wanted to do a little shopping? The 
American economy may particularly need a boost after the housing 
bubble collapses. In the boom years, home refinancings have been a 
major source of consumer spending dollars. If the money supply 
shrinks by $2 trillion in the next housing correction, as some analysts 
have predicted, a supply of spending dollars from abroad could be 
just the quick fix the economy needs to ward off a deflationary crisis. 

There is the concern that U.S. assets could wind up in the hands of 
foreign owners, but there is not much we can do about that short of 
imposing high tariffs or making foreign ownership illegal. We sold 
them the bonds and we owe them the cash. But that is a completely 
different issue from the effects of cashing out foreign-held bonds with 
fiat dollars, which would give foreigners no more claim to our assets 
than they have with the bonds. In the long run, they would have less 
claim to U.S. assets, since their dollar investments would no longer be 


Chapter 39 - Liquidating the Federal Debt 

accruing additional dollars in interest. 

Foreign central banks are reducing their reserves of U.S. securities 
whether we like it or not. The tide is rolling out, and U.S. bonds will 
be flooding back to U.S. shores. The question for the U.S. government 
is simply who will take up the slack when foreign creditors quit rolling 
over U.S. debt. Today, when no one else wants the bonds sold at 
auction, the Fed and its affiliated banks step in and buy them with 
dollars created for the occasion, creating two sets of securities (the 
bonds and the cash) where before there was only one. This inflationary 
duplication could be avoided if the Treasury were to buy back the 
bonds itself and just void them out. Congress could then avoid the 
debt problem in the future by following the lead of the Guernsey 
islanders and simply refusing to go into debt. Rather than issuing 
bonds to meet its costs, it could issue dollars directly. 

Prelude to a Dangerous Stock Market Bubble? 

Even if cashing out the government's bonds did not inflate 
consumer prices, would it not trigger dangerous inflation in the stock 
market, the bond market and the real estate market, the likely targets 
of the f reed-up money? Let's see .... 

In December 2005, the market value of all publicly traded 
companies in the United States was reported at $15.8 trillion. 9 Assume 
that fully half the $8 trillion then invested in government securities 
got reinvested in the stock market. If the government's securities were 
paid off gradually as they came due, new money would enter those 
markets only gradually, moderating any inflationary effects; but 
eventually, the level of stock market investment would have increased 
by 25 percent. Too much? 

Not really. The S&P 500 (a stock index tracking 500 companies in 
leading industries) actually tripled from 1995 to 2000, and no great 
disaster resulted. 10 Much of that rise was due to the technology bubble, 
which later broke; but by 2006, the S&P had gained back most of its 
losses. High stock prices are actually good for investors, who make 
money across the board. Stocks are not household necessities that 
shoot out of reach for ordinary consumers when prices go up. The 
stock market is the casino of people with money to invest. Anyone 
with any amount of money can jump in at any time, at any level. If 
the market continues to go up, investors will make money on resale. 
Although this may look like a Ponzi scheme, it really isn't so long as 


Web of Debt 


$SPX (Weekly) 1500,63 



60 65 70 75 80 85 90 95 00 

S&P 500 Index 
1969-2006 Weekly 

the stocks are bought with cash 
rather than debt. Like with the 
inflated values of prized works 
of art, stock prices would go up 
due to increased demand; and 
as long as the demand remained 
strong, the stocks would 
maintain their value. 

Stock market bubbles are bad 
only when they burst, and they 
burst because they have been 
artificially pumped up in a way 
that cannot be sustained. The 
market crash of 1929 resulted because investors were buying stock 
largely on credit, thinking the market would continue to go up and 
they could pay off the balance from profits. The stock market became 
a speculative pyramid scheme, in which most of the money invested 
in it did not really exist. 11 The bubble burst when reserve requirements 
were raised, making money much harder to borrow. In the scenario 
considered here, the market would not be pumped up with borrowed 
money but would be infused with cold hard cash, the permanent 
money received by bondholders for their government bonds. The 
market would go up and stay up. At some point, investors would 
realize that their shares were overpriced relative to the company's 
assets and would find something else to invest in; but that correction 
would be a normal one, not the sudden collapse of a bubble built on 
credit with no "real" money in it. There would still be the problem of 
speculative manipulation by big banks and hedge funds, but that 
problem too can be addressed — and it will be, in Chapter 43. 

As for the real estate market, cashing out the federal debt would 
probably have little effect on it. Foreign central banks, Social Security 
and other trust funds do not buy real estate; and individual investors 
would not be likely to make that leap either, since cashing out their 
bonds would give them no more money than they had before. Their 
ability to buy a house would therefore not have changed. People 
generally hold short-term T-bills as a convenient way to "bank" money 
at a modest interest while keeping it liquid. They hold longer-term 
Treasury notes and bonds, on the other hand, for a safe and reliable 
income stream that is hassle-free. Neither purpose would be served 
by jumping into real estate, which is a very illiquid investment that 


Chapter 39 - Liquidating the Federal Debt 

does not return profits until the property is sold, except through the 
laborious process of trying to keep it rented. People wanting to keep 
their funds liquid would probably just move the cash into bank savings 
or checking accounts; while people wanting a hassle-free income 
stream would move it into corporate bonds, certificates of deposit and 
the like. Another profit-generating possibility for these funds is explored 
in Chapter 41. 

That just leaves the corporate bond market, which would hardly 
be hurt by an influx of new money either. Fresh young companies 
would have easier access to startup capital; promising inventions could 
be developed; new products would burst onto the market; jobs would 
be created; markets would be stimulated. New capital could only be 
good for productivity. 

A final objection that has been raised to paying off the federal debt 
with newly-issued fiat money is that foreign lenders would be 
discouraged from purchasing U.S. government bonds in the future. 
The Wizard's response to that argument would probably be, "So 
what?" Once the government reclaims the power to create money 
from the banks, it will no longer need to sell its bonds to investors. It 
will not even need to levy income taxes. It will be able to exercise its 
sovereign right to issue its own money, debt-free. That is what British 
monarchs did until the end of the seventeenth century, what the 
American colonists did in the eighteenth century, and what Abraham 
Lincoln did in the nineteenth century. It has also been proposed in 
the twenty-first century, not just by "cranks and crackpots" in the 
money reform camp but by none other than Federal Reserve Chairman 
Ben Bernanke himself. At least, that is what he appears to have 
proposed. The suggestion was made several years before he became 
Chairman of the Federal Reserve, in a speech that earned him the 
nickname "Helicopter Ben". . . . 


Chapter 40 

"[I]t will be no trouble to make the balloon. But in all this country 
there is no gas to fill the balloon with, to make it float. " 

"If it won't float," remarked Dorothy, "it will be of no use to us." 

"True," answered Oz. "But there is another way to make it float, 
which is to fill it with hot air. " 

- The Wonderful Wizard ofOz, 
"How the Balloon Was Launched" 

Balloon imagery is popular today for describing the perilous 
state of the economy. Richard Russell wrote in The Dow Theory 
Letter in August 2006, "The US has become a giant credit, debt and 
deficit balloon. Can the giant debt-balloon be kept afloat? That's 
what we're going to find out in the coming months." Russell warned 
that we have reached the point where pumping more debt into the 
balloon is unsustainable, and that the solution of outgoing Fed 
Chairman Alan Greenspan was no solution at all. He merely concealed 
the M-3 statistics. "If you can't kill the messenger, at least hide him." 1 
The solution of Greenspan's successor Ben Bernanke is not entirely 
clear, since like his predecessors he has been playing his cards close to 
the chest. Being tight-lipped actually appears to be part of the job 
description. When he tried to be transparent, he was roundly criticized 
for spooking the market. But in a speech he delivered when he had to 
be less cautious about his utterances, Dr. Bernanke advocated what 
appeared to be a modern-day version of Lincoln's Greenback solution: 
instead of filling the balloon with more debt, it could be filled with 
money issued debt-free by the government. 


Chapter 40 - Helicopter Money 

The speech was made in Washington in 2002 and was titled 
"Deflation: Making Sure 'It' Doesn't Happen Here." Dr. Bernanke 
stated that the Fed would not be "out of ammunition" to counteract 
deflation just because the federal funds rate had fallen to percent. 
Lowering interest rates was not the only way to get new money into 
the economy. He said, "the U.S. government has a technology, called a 
printing press (or, today, its electronic equivalent), that allows it to produce 
as many U.S. dollars as it wishes at essentially no cost." 

He added, "One important concern in practice is that calibrating 
the economic effects of nonstandard means of injecting money may 
be difficult, given our relative lack of experience with such policies." 2 If 
the government was inexperienced with the policies, they were not 
the usual "open market operations," in which the government prints 
bonds, the Fed prints dollars, and they swap stacks, leaving the gov- 
ernment in debt for money created by the Fed. Dr. Bernanke said that 
the government could print money, and that it could do this at essen- 
tially no cost. The implication was that the government could create 
money without paying interest, and without having to pay it back to 
the Fed or the banks. 

Later in the speech he said, "A money-financed tax cut is essen- 
tially equivalent to Milton Friedman's famous 'helicopter drop' of 
money." Dropping money from helicopters was Professor Friedman's 
hypothetical cure for deflation. The "money-financed tax cut" rec- 
ommended by Dr. Bernanke was evidently one in which taxes would 
be replaced with money that was simply printed up by the government and 
spent into the economy. He added, "[I]n lieu of tax cuts, the govern- 
ment could increase spending on current goods and services or even 
acquire existing real or financial assets." The government could reflate 
the economy by printing money and buying hard assets with it - as- 
sets such as real estate and corporate stock! That is what the earlier 
Populists had proposed: the government could buy whole industries 
and operate them at a profit. The Populists proposed nationalizing 
essential industries that had been monopolized by giant private car- 
tels, including the railroads, steel — and the banks. The profits gener- 
ated by these industries would return to the government, to be used in 
place of taxes. 


Web of Debt 

The Japanese Experiment 

Dr. Bernanke went further than merely suggesting the "helicopter- 
money" solution. He evidently carried it out, and on a massive scale. 
More accurately, the Japanese carried it out at his behest. During a 
visit to Japan in May 2003, he said in a speech to the Japanese: 

My thesis here is that cooperation between the monetary and 
fiscal authorities in Japan [the central bank and the government] 
could help solve the problems that each policymaker faces on its 
own. Consider for example a tax cut for households and 
businesses that is explicitly coupled with incremental BOJ [Bank 
of Japan] purchases of government debt - so that the tax cut is in 
effect financed by money creation? 

Dr. Bernanke was advising the Japanese government that it could 
finance a tax cut by creating money! (Note that this is easier to do in 
Japan than in the United States, since the Japanese government actu- 
ally owns its central bank, the Bank of Japan. 4 ) The same month, the 
Japanese embarked on what British economist Richard Duncan called 
"the most aggressive experiment in monetary policy ever conducted." 5 
In a May 2005 article titled "How Japan Financed Global Reflation," 
Duncan wrote: 

In 2003 and the first quarter of 2004, Japan carried out a 
remarkable experiment in monetary policy - remarkable in the 
impact it had on the global economy and equally remarkable in 
that it went almost entirely unnoticed in the financial press. Over 
those 15 months, monetary authorities in Japan created ¥35 
trillion . . . approximately 1% of the world's annual economic 
output. ¥35 trillion . . . would amount to $50 per person if 
distributed equally among the entire population of the planet. 
In short, it was money creation on a scale never before attempted 
during peacetime. 

Why did this occur? There is no shortage of yen in Japan 
.... Japanese banks have far more deposits than there is demand 
for loans .... So, what motivated the Bank of Japan to print so 
much more money when the country is already flooded with 
excess liquidity? 6 

Duncan explained that the shortage of money was not actually in 
Japan. It was in the United States, where the threat of deflation had appeared 
for the first time since the Great Depression. The technology bubble of 


Chapter 40 - Helicopter Money 

the late 1990s had popped in 2000, leading to a serious global economic 
slowdown in 2001. Before that, the Fed had been bent on curbing 
inflation; but now it had suddenly switched gears and was focusing 
on reflation - the intentional reversal of deflation through government 
intervention. Duncan wrote: 

Deflation is a central bank's worst nightmare. When prices begin 
to fall, interest rates follow them down. Once interest rates fall 
to zero, as is the case in Japan at present, central banks become 
powerless to provide any further stimulus to the economy 
through conventional means and monetary policy becomes 
powerless. The extent of the US Federal Reserve's concern over 
the threat of deflation is demonstrated in Fed staff research papers 
and the speeches delivered by Fed governors at that time. For 
example, in June 2002, the Board of Governors of the Federal 
Reserve System published a Discussion Paper entitled, 
"Preventing Deflation: Lessons from Japan's Experience in the 
1990s." The abstract of that paper concluded "... we draw the 
general lesson from Japan's experience that when inflation and 
interest rates have fallen close to zero, and the risk of deflation is 
high, stimulus - both monetary and fiscal - should go beyond 
the levels conventionally implied by baseline forecasts of future 
inflation and economic activity." 

Just how far beyond the conventional the Federal Reserve was 
prepared to go was demonstrated in the Japanese experiment, in which 
the Bank of Japan created 35 trillion yen over the course of the follow- 
ing year. The yen were then traded with the government's Ministry 
of Finance (MOF) for Japanese government securities, which paid vir- 
tually no interest. The MOF used the yen to buy approximately $320 
billion in U.S. dollars from private parties, which were then used to 
buy U.S. government bonds. 

Duncan wrote, "It is not certain how much of the $320 billion the 
MOF did invest into US Treasury bonds, but judging by their past 
behavior it is fair to assume that it was the vast majority of that 
amount." Assuming all the dollars were so used, the funds were suf- 
ficient to float 77 percent of the U.S. budget deficit in the fiscal year 
ending September 30, 2004. The effect of this unprecedented experi- 
ment, said Duncan, was to finance a broad-based tax cut in the United 
States with newly-created money. The tax cuts were made in America, 
but the money was made in Japan. Three large tax cuts took the U.S. 
budget from a surplus of $127 billion in 2001 to a deficit of $413 billion 


Web of Debt 

in 2004. The difference was a deficit of $540 billion, and it was largely 
"monetized" by the Japanese. 

Duncan asked rhetorically, "Was the BOJ/MOF conducting Gov- 
ernor Bernanke's Unorthodox Monetary Policy on behalf of the Fed? 
. . . Was the BOJ simply serving as a branch of the Fed, as the Federal 
Reserve Bank of Tokyo, if you will?" If so, Duncan said, "it worked 
beautifully" : 

The Bush tax cuts and the BOJ money creation that helped 
finance them at very low interest rates were the two most im- 
portant elements driving the strong global economic expansion 
during 2003 and 2004. Combined, they produced a very global 
reflation. ... US tax cuts and low interest rates fuelled consump- 
tion in the United States. In turn, growing US consumption 
shifted Asia's export-oriented economies into overdrive. China 
played a very important part in that process. . . . China used its 
large trade surpluses with the US to pay for its large trade defi- 
cits with most of its Asian neighbors, including Japan. The recy- 
cling of China's US Dollar export earnings explains the incred- 
ibly rapid "reflation" that began across Asia in 2003 and that 
was still underway at the end of 2004. Even Japan's moribund 
economy began to reflate. 

. . . In 2004, the global economy grew at the fastest rate in 30 
years. Money creation by the Bank of Japan on an unprecedented 
scale was perhaps the most important factor responsible for that 
growth. In fact, ¥35 trillion could have made the difference 
between global reflation and global deflation. How odd that it 
went unnoticed. 7 

The Japanese experiment ended in March 2004, apparently because 
no more intervention was required. The Fed had agreed to begin 
raising interest rates, putting a stop to the flight from the dollar; and 
strong economic growth in the United States had created higher than 
anticipated tax revenues, reducing the need for supplemental budget 
funding. The experiment had "worked beautifully" to reduce deflation 
and provide the money for more U.S. government deficits, except for 
one thing: the U.S. government was now in debt to a foreign power 
for money the Japanese had created with accounting entries — money 
the U.S. government could have created itself. 


Chapter 40 - Helicopter Money 

Can You Trust a Pirate? 

After the Japanese experiment came the Caribbean experiment, 
which was discussed in Chapter 38. Joseph Stroupe, editor of Global 
Events Magazine, warned in 2004: 

[International support for the dollar and for related US economic 
and foreign policies is noticeably weakening, at a time when it is 
most needed to support an unprecedented and mushrooming 

mountain load of debt The appetite of the big Asian economies 

to continue buying dollar assets is waning .... Hence the 
possibility of a Twin Towers-like vertical collapse of the US 
economy is becoming greater, not lesser. 8 

That was the fear, but collapse was averted when "the Pirates of 
the Carribean" stepped in to pick up the unsold bonds, evidently at a 
substantial loss to themselves. As noted earlier, these traders must 
have been fronts for the Federal Reserve itself, which alone has pockets 
deep enough to pull off such a maneuver and absorb the loss. (See 
Chapter 38.) The Fed manipulates markets with accounting-entry 
money funneled through its "primary dealers" - a list of about 30 
investment houses authorized to trade government securities, 
including Goldman Sachs, Morgan Stanley, and Merrill Lynch. 9 These 
banks then use the funds to buy government bonds, in the sort of 
maneuver that might be called "money laundering" if it were done 
privately. (See Chapter 33.) 

In December 2005, M3 increased in a single week by $58.7 billion 
- a 30 percent annualized rate of growth. Financial adviser Robert 
McHugh compared this increase to the hyperinflation seen in banana 
republics. "This is nuts folks," he wrote, "unless there is an incredible 
risk out there we are not being told about. That is a lot of money for 
the Plunge Protection Team's arsenal to buy markets - stocks, bonds, 
currencies, whatever." 10 

The question is, can this secretive private cartel be trusted with so 
much unregulated power? Wouldn't it be cheaper and safer to give 
the power to create dollars to Congress itself, with full accountability 
and full disclosure to the public? Congress would not have to conceal 
the fact that it was financing its own debt. It would not even have to 
go into debt. It could just create the money in full view in an accountable 
way. The power to create money is given to Congress in the 
Constitution. Debt-free government-created money was the financial 
system that got the country through the American Revolution and the 


Web of Debt 

Civil War; the system endorsed by Franklin, Jefferson, and Lincoln; 
the system that Henry Clay, Henry Carey and the American 
Nationalists called the "American system." The government could 
simply acknowledge that it was pumping money into the economy. It 
could explain that the economy needs the government's money to 
prevent a dollar collapse, and that the cheapest and most honest way 
to do it is by creating the money directly and then spending it on 
projects that "promote the general welfare." Laundering the money 
through non-producing middlemen is giving the people's 
Constitutionally-ordained money-creating power away. 

The Fear of Giving Big Government Even More Power 

The usual objections to returning the power to create money to 
Congress are that (a) it would be inflationary, and (b) it would give a 
corrupt government even more power. But as will be detailed in Chap- 
ter 44, government-issued money would actually be less inflationary 
than the system we have now; and it is precisely because power and 
money corrupt that money creation needs to be done by a public body, 
exercised in full view and with full accountability. We can watch our 
congresspersons deliberating every day on C-SPAN. If the people's 
money isn't being spent for the benefit of the people, we can vote our 
representatives out. 

What has allowed government to become corrupted today is that 
it is actually run by the money cartel. Big Business holds all the cards, 
because its affiliated banks have monopolized the business of issuing 
and lending the national money supply, a function the Constitution 
delegated solely to Congress. What hides behind the banner of "free 
enterprise" today is a system in which giant corporate monopolies 
have used their affiliated banking trusts to generate unlimited funds 
to buy up competitors, the media, and the government itself, forcing 
truly independent private enterprise out. Big private banks are al- 
lowed to create money out of nothing, lend it at interest, foreclose on 
the collateral, and determine who gets credit and who doesn't. They 
can advance massive loans to their affiliated corporations and hedge 
funds, which use the money to raid competitors and manipulate mar- 

If some players have the power to create money and others don't, 
the playing field is not "level" but allows some favored players to domi- 
nate and coerce others. These giant cartels can be brought to heel 


Chapter 40 - Helicopter Money 

only by cutting off their source of power and returning it to its rightful 
sovereign owners, the people themselves. Private enterprise needs 
publicly-operated police, courts and laws to keep corporate predators 
at bay. It also needs a system of truly national banks, in which the 
power to create the money and advance the credit of the people is 
retained by the people. We trust government with sweeping powers 
to declare and conduct wars, provide for the general welfare, and 
establish and enforce laws. Why not trust it to create the national 
money supply in all its forms? 

The bottom line is that somebody has to have the power to create 
money. We've seen that gold is too scarce and too inelastic to be the 
national money supply, at least without an expandable fiat-money 
system to back it up; and somebody has to create that fiat system. 
There are only three choices for the job: a private banking cartel, local 
communities acting separately, or the collective body of the people 
acting through their representative government. Today we are 
operating with option #1, a private banking cartel, and it has brought 
the system to the brink of collapse. The privately-controlled Federal 
Reserve, which was chartered specifically to "maintain a stable 
currency," has allowed the money supply to balloon out of control. 
The Fed manipulates the money supply and regulates its value behind 
closed doors, in blatant violation of the Constitution and the antitrust 
laws. Yet it not only can't be held to account; it doesn't even have to 
explain its rationale or reveal what is going on. 

Option #2, the local community fiat alternative, is basically the 
national fiat currency alternative on a smaller scale. As one 
commentator put it, what would you have more confidence in - the 
full faith and credit of Ithaca, New York (population 30,000), or the 
full faith and credit of the United States? The fiat currency of the 
national community has the full force of the nation behind it. And 
even if the politicians in charge of managing it turn out to be no less 
corrupt than private bankers, the money created by the government 
will be debt-free. Shifting the power to create money to Congress can 
relieve future generations of the burden of perpetual interest payments 
to an elite class of financial oligarchs who have advanced nothing of 
their own to earn it. The banking spider that has the country trapped 
in its debt web could be decapitated, returning national sovereignty 
to the people themselves. 


Section VI 


The great spider was lying asleep when the Lion found him .... 
It had a great mouth, with a row of sharp teeth a foot long; but its 
head was joined to the pudgy body by a neck as slender as a wasp's 
waist. This gave the Lion a hint of the best way to attack the creature. 
. . . [WJith one blow of his heavy paw, all armed with sharp claws, he 
knocked the spider's head from its body. 

- The Wonderful Wizard ofOz, 
"The Lion Becomes the King of Beasts" 

Chapter 41 


"If I put an end to your enemy, will you bow down to me and obey 
me as the King of the Forest?" inquired the Lion. 

"We will do that gladly," replied the tiger. . . . 

"Take good care of these friends of mine," said the Lion, "and I will 
go at once to fight the monster." 

— The Wonderful Wizard ofOz, 
"The Lion Becomes the King of Beasts" 

William Jennings Bryan, the Cowardly Lion of The Wizard of Oz, 
proved his courage by challenging the banking cartel's right to create 
the national money supply. He said in the speech that won him the 
Democratic nomination in 1896: 

[W]e believe that the right to coin money and issue money is a function 
of government. . . . Those who are opposed to this proposition tell 
us that the issue of paper money is a function of the bank and 
that the government ought to go out of the banking business. I 
stand with Jefferson . . . and tell them, as he did, that the issue of 
money is a function of the government and that the banks should go 
out of the governing business. . . . [W]hen we have restored the 
money of the Constitution, all other necessary reforms will be 
possible, and . . . until that is done there is no reform that can be 

The "money of the Constitution" was money created by the people 
rather than the banks. Technically, the Constitution gave Congress 
the exclusive power only to "coin" money; but the Constitution was 
drafted in the eighteenth century, when most forms of money in use 


Chapter 41 - Restoring Natonal Soverignty 

today either did not exist or were not recognized as money. Thomas 
Jefferson said that Constitutions needed to be updated to suit the times. 
A contemporary version of the Constitutional provision that "Con- 
gress shall have the power to coin money" would give Congress the 
exclusive power to create the national currency in all its forms.' 

That would mean either abolishing the Federal Reserve or making 
it what most people think it now is - a truly federal agency. If the 
Federal Reserve were an arm of the U.S. government, the dollars it 
generated could go directly into the U.S. Treasury, without the need 
to add to a crippling federal debt by "funding" them with bonds. That 
would take care of 3 percent of the U.S. money supply, but what about 
the other 97 percent that is now created as commercial loans? Would 
giving Congress the exclusive power to create money mean the gov- 
ernment would have to go into the commercial lending business? 

Perhaps, but why not? As Bryan said, banking is the government's 
business, by Constitutional mandate. At least, that part of banking is 
the government's business that involves creating new money. The 
rest of the lending business could continue to be conducted privately, 
just as it is now. Banks would just join those non-bank lending 
institutions that do not create the money they lend but merely recycle 
pre-existing funds, including finance companies, pension funds, mutual 
funds, insurance companies, and securities dealers. 1 Banks would do 
what most people think they do now — borrow money at a low interest 
rate and lend it at a higher rate. 

Returning the power to create money to the government would be 
more equitable and more Constitutional than the current system, but 
what would it do to bank profits? That was the concern of government 
officials who reviewed such a proposal recently in England .... 

The Fate of a British Proposal for Monetary Reform 

The Bank of England was actually nationalized in 1946, but the 
monetary scheme did not change much as a result. The government 
took over the function of printing paper money; but in England, as in 
the United States, printed paper money makes up only a very small 
percentage of the money supply. The bankers still have the power to 

' As an aside to community currency advocates: this would not prevent local 
organizations from issuing private currencies, which are not the national 
medium of exchange but are contractual agreements between private parties. 


Web of Debt 

create money as loans, leaving them in control of the money spigots. 3 
In Monetary Reform: Making It Happen (2003), James Robertson 
observed that 97 percent of Britain's money supply is now created by 
banks when they advance credit. The result is a grossly unfair windfall 
to the banks, which get the use of money that is properly an asset of 
the people. He proposed reforming the system so that it would be 
illegal for banks to create money as loans, just as it is illegal to forge 
coins or counterfeit banknotes. Only the central bank could create 
new money. Commercial banks would have to borrow existing money 
and relend it, just as non-bank financial institutions do now. In 
Robertson's proposed system, new money created by the central bank 
would not go directly to the commercial banks but would be given to 
the government to spend into circulation, where it would eventually 
find its way back to the banks and could be recycled by them as loans. 4 

It sounded good in theory, but when the plan was run past several 
government officials, they maintained that the banks would go broke 
under such a scheme. Depriving banks of the right to advance credit 
on the "credit multiplier" system (the British version of fractional 
reserve lending) would increase the costs of borrowing; would raise 
the costs of payment services; would force banks to cut costs, close 
branches and reduce jobs; and would damage the international 
competitiveness of British banks and therefore of the British economy 
as a whole. An official with the title of Shadow Chancellor of the 
Exchequer warned, "Legislating against the credit multiplier would 
lead to the migration from the City of London of the largest collection 
of banks in the world. It would be a disaster for the British economy." 

Another official bearing the title of Treasury Minister argued that 
"if banks were obliged to bid for funds from lenders in order to make 
loans to their customers, the costs to banks of extending credit would 
be significant, adversely affecting business investment, especially of 
small and medium-sized firms." This official wrote in an August 2001 

It is evident that this proposal would cause a dramatic loss in 
profits to the banks - all else [being] equal they would still face 
the costs of running the payments system but would not be able 
to make profitable loans using the deposits held in current 
accounts. In this case, it is highly likely that banks will attempt 
to maintain their profitability by re-locating to avoid the 
restriction on their operations that the proposed reform involves. 5 


Chapter 41 - Restoring Natonal Soverignty 

And there was the rub: in London, banking is very big business. If 
the banks were to move en masse to the Continent, the British economy 
could collapse like a house of cards. 

The 100 Percent Reserve Solution 

A proposal similar to the Robertson plan was presented to the 
U.S. Congress by Representative Jerry Voorhis in the 1940s. Called 
"the 100 Percent Reserve Solution," it was first devised in 1926 by 
Professor Frederick Soddy of Oxford and was revived in 1933 by 
Professor Henry Simons of the University of Chicago. The plan was 
to require banks to establish 100 percent reserve backing for their 
deposits, something they could do by borrowing enough newly-created 
money from the U.S. Treasury to make up the shortfall. 

"With this elegant plan," wrote Stephen Zarlenga in The Lost 
Science of Money, "all the bank credit money the banks have created 
out of thin air, through fractional reserve banking, would be 
transformed into U.S. government legal tender - real, honest money." 
The plan was elegant, but like the later Robertson proposal, it would 
have been quite costly for the banks. It died when Representative 
Voorhis lost his seat to Richard Nixon in a vicious campaign funded 
by the bankers. 6 

The 100 Percent Reserve Solution was revived by Robert de Fremery 
in a series of articles published in the 1960s. 7 Under his proposal, 
banks would have two sections, a deposit or checking-account section 
and a savings-and-loan section: 

The deposit section would merely be a warehouse for money. 
All demand deposits would be backed dollar for dollar by actual 
currency in the vaults of the bank. The savings-and-loan section 
would sell Certificates of Deposit (CDs)" of varying maturities - 
from 30 days to 20 years - to obtain funds that could be safely 
loaned for comparable periods of time. Thus money obtained 
by the sale of 30-day, one-year and five-year CDs, etc., could be 
loaned for 30 days, one year and five years respectively - not 
longer. Banks would then be fully liquid at all times and never 
again need fear a liquidity crisis. 

11 Certificate of deposit (CD): a time deposit with a bank which bears a specific 
maturity date (from three months to five years) and a specified interest rate, much 
like bonds. 


Web of Debt 

The liquidity crisis de Fremery was concerned with came from 
"borrowing short and lending long" — borrowing short-term deposits 
and committing them to long-term loans — a common practice that 
exposes banks to the risk that their depositors will withdraw their 
money before the loans come due, leaving the banks short of lendable 
funds. Just such a liquidity crisis materialized in the summer of 2007, 
when holders of collateralized debt obligations or CDOs (securities 
backed by income-producing assets) discovered that what they thought 
were triple-A investments were infected with "toxic" subprime debt. 
The value of the CDOs crashed, making banks and other investors 
either reluctant or unable to lend as before; and that included lending 
the money market funds relied on by banks to get through a short- 
term shortage. The other option for banks short of funds is to borrow 
from the Fed, which can advance accounting-entry money as needed; 
and that is what it has been doing, with a vengeance. Recall the $38 
billion credit line the Fed made available on a single day in August 
2007. (See Chapter 2.) This "credit" was money created out of thin 
air, something central banks are considered entitled to do as "lenders 
of last resort." 8 The taxpayer bailouts that used to cause politicians to 
lose votes are being replaced with the hidden tax of a massive stealth 
inflation of the money supply by the "banker's bank" the Federal 
Reserve, inflating prices and reducing the value of the dollar. 

DeFremery's 100 percent reserve solution would have avoided this 
sort of banking crisis and its highly inflationary solution by limiting 
banks to lending only money they actually have. The American 
Monetary Institute, an organization founded by Stephen Zarlenga for 
furthering monetary reform, has drafted a model American Monetary 
Act that would achieve this result by imposing a 100 percent reserve 
requirement on all checking-type bank accounts. As in de Fremery' s 
proposal, these accounts could not be the basis for loans but would 
simply be "a warehousing and transferring service for which fees are 
charged." The Federal Reserve System would be incorporated into 
the U.S. Treasury, and all new money would be created by these merged 
government agencies. New money would be spent into circulation by 
the government to promote the general welfare, monitored in a way 
so that it was neither inflationary nor deflationary. It would be spent 
on infrastructure, including education and health care, creating jobs, 
re-invigorating local economies, and re-funding government at all 
levels. Banks would lend in the way most people think they do now: 
by simply acting as intermediaries that accepted savings deposits and 
lent them out to borrowers. 9 


Chapter 41 - Restoring Natonal Soverignty 

A model Monetary Reform Act drafted by Patrick Carmack, author 
of the popular documentary video The Money Masters, would go even 
further. It would impose a 100 percent reserve requirement on all 
bank deposits, including savings deposits. Recall that most "savings 
deposits" are still "transaction accounts," in which the money is readily 
available to the depositor. If it is available to the depositor, it cannot 
have been "lent" to someone else without duplicating the funds. Under 
Carmack' s proposal, banks that serviced depositors could not lend at 
all unless they were using their own money. If banks wanted to make 
loans of other people's money, they would have to set up separate 
institutions for that purpose, not called "banks," which could lend 
only pre-existing funds. Banks making loans would join those other 
lending institutions that can lend only when they first have the money 
in hand. "Deposits" would not be counted as "reserves" against which 
loans could be made but would be held in trust for the exclusive use of 
the depositors. 10 

How to Eliminate Fractional Reserve Banking 
Without Eliminating the Banks 

If the power to create the national money supply is going to be the 
exclusive domain of Congress, 100 percent backing will have to be 
required for any private bank deposits that can be withdrawn on 
demand, to avoid the electronic duplication that is the source of growth 
in the money supply today. But like the Robertson plan proposed in 
England, proposals for requiring 100 percent reserves have met with 
the objection that they could bankrupt the banks. We've seen that 
when a bank makes a loan, it merely writes a deposit into the 
borrower's account, treating the deposit as a "liability" of the bank. 
This is money the bank owes to the borrower in return for the 
borrower's promise to pay it back. Under a 100 percent reserve system, 
all of these bank liabilities would have to be "funded" with real money. 
Federal Reserve Statistical Release H.8 put the total "loans and leases 
in bank credit" of all U.S. banks as of April 2007 at $6 trillion. 11 Since 
banks today operate with minimal reserves (10 percent or even less), 
they might have to borrow 90 percent of $6 trillion in "real" money to 
meet a 100 percent reserve requirement. Where would they find the 
money to service these loans? They would have to raise interest rates 
and reduce the interest they paid to depositors, shrinking their profit 
margins, squeezing their customers, and driving them into the arms 


Web of Debt 

of those non-bank competitors that have already usurped a major 
portion of the loan market. Just the rumor that the banks were going 
to have to incur substantial new debt could make bank share values 

William Hummel is not actually in the money reform camp, but in 
a December 2006 critique of the 100 percent reserve solution, he raised 
some interesting issues and alternatives. Rather than borrowing from 
the government, he suggested that the banks could sell their existing 
loans to investors, getting the loans off their books. 12 That is not actu- 
ally a new idea. It is something the banks have been doing for a num- 
ber of years. In 2007, "securitized" mortgage debts (mortgages sliced 
into mortgage-backed securities) were reported at $6.5 trillion, or about 
one-half of all outstanding mortgage debt (totaling $13 trillion). 
"Securitized" debt is debt that has been off-loaded by selling it to 
investors, who collect the interest as it comes due. In effect, the banks 
have merely acted as middlemen, bringing investors with funds to- 
gether with borrowers who need funding. This is the role of "invest- 
ment banks" - putting together deals, finding investors for projects 
in need of funds. It is also the role played by bank intermediaries in 
"Islamic banking." The bank sets up profit-sharing arrangements in 
which investors buy "stock" rather than interest-bearing "bonds." 

Where could enough investors be found to fund close to $6 trillion 
in outstanding bank loans? Recall the nearly $9 trillion in bond money 
that would be freed up if the federal debt were paid off by "monetiz- 
ing" it with new Greenback dollars. People who had previously stored 
their savings in government bonds would be looking for a steady source 
of income to replace the interest stream they had just lost. Investment 
fund managers, quick to see an opportunity, would no doubt form 
funds just for this purpose. They could buy up the banks' existing 
loans with money from their investors and bundle them into securi- 
ties. The investors would then be paid interest as it accrued on the 
loans. In this way, the same Greenback dollars that had "monetized" 
the federal debt could be used to monetize the $6 trillion in bank loans 
created with accounting entries by the banks. 

Investors today have become leery of buying securitized debt, but 
this is due largely to lax disclosure and regulation. If the securities 
laws were strengthened so that all risks were known and on the table, 
at some price investors could no doubt be found; and if they couldn't, 
the banks could still turn to the Fed for an advance of funds — which 
is just what they have been doing, accepting a lifeline from the Fed in 
the form of massive bailouts with highly inflationary accounting-entry 
money. The difference under a 100 percent reserve system would be 


Chapter 41 - Restoring Natonal Soverignty 

that the Federal Reserve would actually be federal, operating its bailouts 
in a way that benefited the people rather than just inflating their dollars 
away. (More on this in Chapter 43.) 

The Banking System Is Already Bankrupt 

To the charge that imposing a 100 percent reserve requirement 
could bankrupt the banks, the Wizard's retort might be that the banking 
system is already bankrupt. The 300-year fractional-reserve Ponzi 
scheme has reached its mathematical end-point. The bankers' chickens 
have come home to roost, and only a radical overhaul will save the system. 
Nouriel Roubini, Professor of Economics at New York University and 
a former advisor to the U.S. Treasury, gave this bleak assessment in a 
November 2007 newsletter: 

I now see the risk of a severe and worsening liquidity and credit 
crunch leading to a generalized meltdown of the financial system of 
a severity and magnitude like we have never observed before. In this 
extreme scenario whose likelihood is increasing we could see a 
generalized run on some banks; and runs on a couple of weaker 
(non-bank) broker dealers that may go bankrupt with severe 
and systemic ripple effects on a mass of highly leveraged 
derivative instruments that will lead to a seizure of the 
derivatives markets . . . ; massive losses on money market funds 
. . . ; ever growing defaults and losses ($500 billion plus) in 
subprime, near prime and prime mortgages . . . ; severe problems 
and losses in commercial real estate . . . ; the drying up of liquidity 
and credit in a variety of asset backed securities putting the entire 
model of securitization at risk; runs on hedge funds and other 
financial institutions that do not have access to the Fed's lender 
of last resort support; [and] a sharp increase in corporate defaults 
and credit spreads .... 13 

The private banking system can no longer be saved with a stream 
of accounting-entry "reserves" to support an expanding pyramid of 
"fractional reserve" lending. If private banks are going to salvage 
their role in the economy, they are going to have to move into some 
other line of work. Chris Cook is a British market consultant who 
was formerly director of the International Petroleum Exchange. He 
observes that the true role of banks is to serve as guarantors and 
facilitators of deals. The seller wants his money now, but the buyer 
doesn't have it; he wants to pay over time. So the bank steps in and 


Web of Debt 

advances "credit" by creating a deposit from which the borrower can 
pay the seller. The bank then collects the buyer's payments over 
time, adding interest as its compensation for assuming the risk that 
the buyer won't pay. The glitch in this model is that the banks don't 
create the interest, so larger and larger debt-bubbles have to be created 
to service the collective debt. A mathematically neater way to achieve 
this result is through "investment banking" or "Islamic banking" — 
bringing investors together with projects in need of funds. The money 
already exists; the bank just arranges the deal and the issuance of 
stock. The arrangement is a joint venture rather than a creditor-debtor 
relationship. The investor makes money only if the company makes 
money, and the company makes money only if it produces goods and 
services that add value to the economy. The parasite becomes a partner} 4 
Businesses and individuals do need a ready source of credit, and 
that credit could be created from nothing and advanced to borrowers 
under a 100 percent reserve system, just as is done now. The difference 
would be that the credit would originate with the government, which 
alone has the sovereign right to create money; and the interest on it 
would be returned to the public purse. In effect, the government would 
just be serving as a "credit clearing exchange," or as the accountant in 
a community system of credits and debits. (More on this later.) 

A System of National Bank Branches 
to Service Basic Public Banking Needs? 

Hummel points out that if private banks could no longer lend their 
deposits many times over, they would have little incentive to service 
the depository needs of the public. Depository functions are basically 
clerical and offer little opportunity for income except fees for service. 
Who would service the public's banking needs if the banks lost interest 
in that business? In How Credit-Money Shapes the Economy, Professor 
Guttman notes that our basic banking needs are fairly simple. We 
need a safe place to keep our money and a practical way to transfer it 
to others. These services could be performed by a government agency 
on the model of the now-defunct U.S. Postal Savings System, which 
operated successfully from 1911 to 1967, providing a safe and efficient 
place for customers to save and transfer funds. It issued U.S. Postal 
Savings Bonds in various denominations that paid annual interest, as 
well as Postal Savings Certificates and domestic money orders. 15 The 
U.S. Postal Savings System was set up to get money out of hiding, 


Chapter 41 - Restoring Natonal Soverignty 

attract the savings of immigrants accustomed to saving at post offices 
in their native countries, provide safe depositories for people who had 
lost confidence in private banks, and furnish more convenient 
depositories for working people than were provided by private banks. 
(Post offices then had longer hours than banks, being open from 8 
a.m. to 6 p.m. six days a week.) The postal system paid two percent 
interest on deposits annually. The minimum deposit was $1 and the 
maximum was $2,500. Savings in the system spurted to $1.2 billion 
during the 1930s and jumped again during World War II, peaking in 
1947 at almost $3.4 billion. The U.S. Postal Savings System was shut 
down in 1967, not because it was inefficient but because it became 
unnecessary after private banks raised their interest rates and offered 
the same governmental guarantees that the postal savings system had. 16 
The services offered by a modern system of federally-operated bank 
branches would have to be modified to reflect today's conditions, but 
the point is that the government has done these things before and 
could do them again. Indeed, if "fractional reserve" banking were 
eliminated, those functions could fall to the government by default. 
Hummel suggests that it would make sense to simplify the banking 
business by transferring the depository role to a system of bank branches 
acting as one entity under the Federal Reserve. Among other 
advantages, he says: 

Since all deposits would be entries in a common computer 
network, determining balances and clearing checks could be done 
instantly, thereby eliminating checking system float"' and its 
logistic complexities. . . . 

With the Fed operating as the sole depository, payments 
would only involve the transfer of deposits between accounts 
within a single bank. This would allow for instant clearing, 
eliminate the nuisance of checking system float, and significantly 
reduce associated costs. Additional advantages include the 
elimination of any need for deposit insurance, and ending 
overnight sweeps" and other sterile games that banks play to 

III Float: the time that elapses between when a check is deposited and the funds 
are available to the depositor, during which the bank is collecting payment from 
the payer's bank. 

IV The overnight sweep is a tactic for maximizing interest by " sweeping" funds 
not being immediately used in a low-interest account into a high-interest ac- 
count, where they remain until the balance in the low-interest account drops 
below a certain minimum. 


Web of Debt 

get around the fractional reserve requirement. 17 

In Hummel' s model, the Fed would be the sole depository and 
only its branches would be called "banks." Institutions formerly called 
banks would have to close down their depository operations and 
would become "private financial institutions" (PFIs), along with fi- 
nance companies, pension funds, mutual funds, insurance companies 
and the like. Some banks would probably sell out to existing PFIs. 
PFIs could borrow from the Fed just as banks do now, but the interest 
rate would be set high enough to discourage them from engaging in 
"purely speculative games in the financial markets." Without the de- 
pository role, banks would no longer need the same number of branch 
offices. The Fed would probably offer to buy them in setting up its 
own depository branch offices. Hummel suggests that a logical way 
to proceed would be to gradually increase the reserve ratio require- 
ment on existing depositories until it reached 100 percent. 

The National Credit Card 

A system of publicly-owned bank branches could also solve the 
credit card problem. Hummel notes that imposing a 100 percent reserve 
requirement on the banks would mean the end of the private credit 
card business. Recall that when a bank issues credit against a 
customer's charge slip, the charge slip is considered a "negotiable 
instrument" that becomes an "asset" against which the bank creates 
a "liability" in the form of a deposit. The bank balances its books 
without debiting its own assets or anyone else's account. The bank is 
thus creating new money, something private banks could no longer 
do under a 100 percent reserve system. But the ability to get ready 
credit against the borrower's promise to pay is an important service 
that would be sorely missed if banks could no longer engage in it. If 
your ability to use your credit card were contingent on your bank's 
ability to obtain scarce funds in a competitive market, you might find, 
when you went to pay your restaurant bill, that credit had been denied 
because your bank was out of lendable funds. 

The notion that money has to "be there" before it can be borrowed 
is based on the old commodity theory of money. Theorists from Cotton 
Mather to Benjamin Franklin to Michael Linton (who designed the 
LETS system) have all defined "money" as something else. It is simply 
"credit" - an advance against the borrower's promise to repay. Credit 
originates with that promise, not with someone else's deposit of 
something valuable in the bank. Credit is not dependent on someone 


Chapter 41 - Restoring Natonal Soverignty 

else having given up his rights to an asset for a period of time, and 
"reserves" are not necessary for advancing it. What is wrong with the 
current system is not that money is advanced as a credit against the 
borrower's promise to repay but that the interest on this advance accrues to 
private banks that gave up nothing of their own to earn it. This problem 
could be rectified by turning the extension of credit over to a system of 
truly national banks, which would be authorized to advance the "full 
faith and credit of the United States" as agents of Congress, which is 
authorized to create the national money supply under the Constitution. 

Credit card services actually are an extension of the depository 
functions of banks. The link with bank deposits is particularly obvious 
in the case of those debit cards that can be used to trigger ATM 
machines to spit out twenty dollar bills. When you make a transfer or 
withdrawal on your debit card, the money is immediately transferred 
out of your account, just as if you had written a check. When you use 
your credit card, the link is not quite so obvious, since the money 
doesn't come out of your account until later; but it is still your money 
that is being advanced, not someone else's. Again, your promise to 
pay becomes an asset and a liability of the bank at the same time, 
without bringing any of the bank's or any other depositor's money 
into the deal. The natural agency for handling this sort of transaction 
would be an institution that is authorized both to deal with deposits 
and to create credit-money with accounting entries, something a truly 
"national" bank could do as an agent of Congress. A government 
banking agency would not be driven by the profit motive to gouge 
desperate people with exorbitant interest charges. Credit could be 
extended at interest rates that were reasonable, predictable and fixed. 
In appropriate circumstances, credit might even be extended interest- 
free. (More on this in Chapter 42.) 

Old Banks Under New Management 

The branch offices set up by a truly federal Federal Reserve would 
not need to be new entities, and they would not need to take over the 
whole banking business. They could be existing banks that had been 
bought by the government or picked up in bankruptcy. As we'll see in 
Chapter 43, the same mega-banks that handle a major portion of the 
nation's credit card business today may already be insolvent, making 
them prime candidates for FDIC receivership and government takeover. 
If just those banking giants were made government agencies, they 


Web of Debt 

might provide enough branches to service the depository and credit 
card needs of the citizenry, leaving the lending of pre-existing funds 
to private financial institutions just as is done now. 

Note too that the government would not actually have to run these 
new bank branches. The FDIC could just hire new management or 
give the old management new guidelines, redirecting them to operate 
the business for the benefit of the public. As in any corporate 
acquisition, not much would need to change beyond the names on the 
stock certificates. Business could carry on as before. The employees 
would just be under new management. The banks could advance 
loans as accounting entries, just as they do now. The difference would 
be that interest on advances of credit, rather than going into private 
vaults for private profit, would go into the coffers of the government. 
The "full faith and credit of the United States" would become an asset of the 
United States. 

A Money Supply That Regulates Itself? 

Hummel points to another wrinkle that would need to be worked 
out in a 100 percent reserve system: the extension of credit by private 
banks plays an important role in regulating the national money supply. 
Public borrowing is the natural determinant of monetary growth. When 
banks extend credit, the money supply expands naturally to meet the 
needs of growth and productivity. If a 100 percent reserve requirement 
were imposed, the money supply could not grow in this organic way, 
so growth would have to be brought about by some artificial means. 

One alternative would be for the government to expand the money 
supply according to a set formula. Milton Friedman suggested a fixed 
4 percent per year. But such a system would not allow for modifying 
the money supply to respond to external shocks or varying internal 
needs. Another alternative would be to delegate monetary expansion 
to a monetary board of some sort, which would be authorized to 
determine how much new money the government could issue in any 
given period. But that alternative too would be subject to the vagaries 
of human error and manipulation for private gain. We've seen the 
roller-coaster results when the Fed has been allowed to manipulate 
the money supply by arbitrarily changing interest rates and reserve 
requirements. The Great Depression was blamed on Fed tinkering. 

Why does the money supply need to be manipulated by the Federal 
Reserve? Consumer loans are self-liquidating: the new money they 


Chapter 41 - Restoring Natonal Soverignty 

create is eventually paid back and zeroes out. But that result is skewed 
by the charging of interest, and by the fact that the burgeoning federal 
debt never gets repaid but just keeps growing. The money supply 
expands because government securities (or debt) are sold to the Federal 
Reserve and to commercial banks, which buy them with money created 
out of thin air; and it is this unchecked source of expansion that has to 
be regulated by artificial means. In a system without a federal debt 
and without interest, consumer debt should be able to regulate itself. 
That sort of model is found in the LETS system, in which "money" is 
created when someone pays someone else with "credits," and it is 
liquidated when the credits are used up. Here is a simple example: 

Jane bakes cookies for Sam. Sam pays Jane one LETS credit by 
crediting her account and debiting his. "Money" has just been created. 
Sam washes Sue's car, for which Sue gives Sam one LETS credit, 
extinguishing the debit in his account and creating one in hers. Sue 
babysits for Jane, who pays with the LETS credit Sam gave her. The 
books are now balanced, and no inflation has resulted. There is no 
longer any "money" in the system, but there is still plenty of "credit," 
which can be created by anyone just by doing work for someone else. 

The LETS system is a community currency system in which no 
gold or other commodity is needed to make it work. "Money" (or 
"credit") is generated by the participants themselves. Projecting this 
account-tallying model onto the larger community known as a nation, 
money would come into existence when it was borrowed from the 
community-owned bank, and it would be extinguished as the loans 
were repaid. That is actually how money is generated now; but the 
creators of this public credit are not the community at large but are 
private bankers who distort the circular flow of the medium of 
exchange by siphoning off a windfall profit in the form of interest. 
The charging of interest, in turn, creates the "impossible contract" 
problem - the spiral of inflation and unrepayable debt resulting when 
more money must be paid back than is created in the form of loans. In 
community LETS systems, this problem is avoided because interest is 
not charged. But an interest-free national system is unlikely any time 
soon, and interest serves some useful functions. It encourages borrowers 
to repay their debts quickly, discourages speculation, compensates 
lenders for foregoing the use of their money for a period of time, and 
provides retired people with a reliable income. How could these benefits 
be retained without triggering the "impossible contract" problem? As 
Benjamin Franklin might have said, "That is simple" .... 


Chapter 42 

''Back where I come from, we have universities, seats of great 
learning, where men go to become great thinkers, and when they 
come out, they think deep thoughts, and with no more brains than 
you have. But they have one thing that you haven't got, a diploma. " 

- The Wizard ofOz to the Scarecrow 

Like Andrew Jackson and Abraham Lincoln, Benjamin Franklin 
was a self-taught genius. He invented bifocals, the Franklin 
stove, the odometer, and the lightning rod. He was also called "the 
father of paper money." He did not actually devise the banking sys- 
tem used in colonial Pennsylvania, but he wrote about it, promoted it, 
and understood its superiority over the private British gold-based sys- 
tem. When the directors of the Bank of England asked what was 
responsible for the booming economy of the young colonies, Franklin 
explained that the colonial governments issued their own money, 
which they both lent and spent into the economy. He is reported to 
have said: 

[A] legitimate government can both spend and lend money 
into circulation, while banks can only lend significant amounts 
of their promissory bank notes .... Thus, when your bankers 
here in England place money in circulation, there is always a 
debt principal to be returned and usury to be paid. The result 
is that you have always too little credit in circulation . . . and 
that which circulates, all bears the endless burden of unpay- 
able debt and usury. 


Chapter 42 - The Question of Interest 

A money supply created by banks was never sufficient, because 
the bankers created only the principal and not the interest needed to 
pay back their loans. A government, on the other hand, could not only 
lend but spend money into the economy, covering the interest shortfall 
and keeping the money supply in balance. In an article titled "A 
Monetary System for the New Millennium," Canadian money reform 
advocate Roger Langrick explains this concept in contemporary terms. 
He begins by illustrating the mathematical impossibility inherent in a 
system of bank-created money lent at interest: 

[I]magine the first bank which prints and lends out $100. 
For its efforts it asks for the borrower to return $110 in one year; 
that is it asks for 10% interest. Unwittingly, or maybe wittingly, 
the bank has created a mathematically impossible situation. The 
only way in which the borrower can return 110 of the bank's 
notes is if the bank prints, and lends, $10 more at 10% 
interest. . . . 

The result of creating 100 and demanding 110 in return, is 
that the collective borrowers of a nation are forever chasing a 
phantom which can never be caught; the mythical $10 that were 
never created. The debt in fact is unrepayable. Each time $100 
is created for the nation, the nation's overall indebtedness to the 
system is increased by $110. The only solution at present is 
increased borrowing to cover the principal plus the interest of 
what has been borrowed. 1 

The better solution, says Langrick, is to allow the government to 
issue enough new debt-free Greenbacks to cover the interest charges 
not created by the banks as loans: 

Instead of taxes, government would be empowered to create 
money for its own expenses up to the balance of the debt shortfall. 
Thus, if the banking industry created $100 in a year, the 
government would create $10 which it would use for its own 
expenses. Abraham Lincoln used this successfully when he 
created $500 million of "greenbacks" to fight the Civil War. 

In Langrick' s example, a private banking industry pockets the 
interest, which must be replaced every year by a 10 percent issue of 
new Greenbacks; but there is another possibility. The loans could be 
advanced by the government itself. The interest would then return to 
the government and could be spent back into the economy in a circular 
flow, without the need to continually issue more money to cover the 


Web of Debt 

interest shortfall. Government as the only interest-charging lender 
might not be a practical solution today, but it is a theoretical extreme 
that can be contrasted with the existing system to clarify the issues. 
Compare these two hypothetical models: 

Bad Witch/Good Witch Scenarios 

The Wicked Witch of the West rules over a dark fiefdom with a 
single private bank owned by the Witch. The bank issues and lends 
all the money in the realm, charging an interest rate of 10 percent. 
The Witch prints 100 witch-dollars, lends them to her constituents, 
and demands 110 back. The people don't have the extra 10, so the 
Witch creates 10 more on her books and lends them as well. The 
money supply must continually increase to cover the interest, which 
winds up in the Witch's private coffers. She gets progressively richer, 
as the people slip further into debt. She uses her accumulated profits 
to buy things she wants. She is particularly fond of little thatched 
houses and shops, of which she has an increasingly large collection. 
To fund the operations of her fiefdom, she taxes the people heavily, 
adding to their financial burdens. 

Glinda the Good Witch of the South runs her realm in a more 
people-friendly way. All of the money in the land is issued and lent 
by a "people's bank" operated for their benefit. She begins by creat- 
ing 110 people's-dollars. She lends 100 of these dollars at 10 percent 
interest and spends the extra 10 dollars into the community on pro- 
grams designed to improve the general welfare - things such as pen- 
sions for retirees, social services, infrastructure, education, research 
and development. The $110 circulates in the community and comes 
back to the people's bank as principal and interest on its loans. Glinda 
again lends $100 of this money into the community and spends the 
other $10 on public programs, supplying the interest for the next round 
of loans while providing the people with jobs and benefits. 

For many years, she just recycles the same $110, without creating 
new money. Then one year, a cyclone comes up that destroys many 
of the charming little thatched houses. The people ask for extra money 
to rebuild. No problem, says Glinda; she will just print more people's- 
dollars and use them to pay for the necessary labor and materials. 
Inflation is avoided, because supply increases along with demand. 
Best of all, taxes are unknown in the realm. 


Chapter 42 - The Question of Interest 

A Practical Real-world Model 

It sounds good in a fairytale, in a land with a benevolent queen 
and only one bank; but things are a bit different in the real world. For 
one thing, enlightened benevolent queens are hard to come by. For 
another thing, returning all the interest collected on loans to the 
government would require nationalizing not only the whole banking 
system but every other form of private lending at interest, an alternative 
that is too radical for current Western thinking. A more realistic model 
would be a dual lending system, semi-private and semi-public. The 
government would be the initial issuer and lender of funds, and private 
financial institutions would recycle this money as loans. Private lenders 
would still be siphoning interest into their own coffers, just not as 
much. The money supply would therefore still need to expand to 
cover interest charges, just not by as much. The actual amount by 
which it would need to expand and how this could be achieved without 
creating dangerous price inflation are addressed in Chapter 44. 

Interest and Islam 

Instituting a system of government-owned banks may sound 
radical in the United States, but some countries have already done it; 
and some other countries are ripe for radical reform. Rodney 
Shakespeare, author of The Modern Universal Paradigm (2007), 
suggests that significant monetary reform may come first in the Islamic 
community. Islamic reformers are keenly aware of the limitations of 
the current Western system and are actively seeking change, and oil- 
rich Islamic countries may have the clout to pull it off. 

As noted earlier, Western lenders got around the religious 
proscription against "usury" (taking a fee for the use of money) by 
redefining the term to mean taking "excessive" interest; but Islamic 
purists still hold to the older interpretation. The Islamic Republic of 
Iran has a state-owned central bank and has led the way in adopting 
the principles of the Koran as state government policy, including 
interest-free lending. In September 2007, Iran's President advocated 
returning to an interest-free system and appointed a new central bank 
governor who would further those objectives. The governor said that 
banks should generate income by charging fees for their services rather 
than making a profit by receiving interest on loans. 2 

That could be a covert factor in the persistent drumbeats for war 
against Iran, despite a December 2007 National Intelligence Estimate 


Web of Debt 

finding that the country was not developing nuclear weapons, the 
asserted justification for a very aggressive stance against it. We've 
seen that a global web of debt spun from compound interest is key to 
maintaining the "full-spectrum dominance" of the private banking 
monopoly currently controlling international markets. A paper titled 
"Rebuilding America's Defenses," released in September 2000 by a 
politically influential neoconservative think tank called the Project 
for the New American Century, linked America's "national defense" 
to suppressing economic rivals. The policy goals it urged included 
"ensuring economic domination of the world, while strangling any 
potential 'rival' or viable alternative to America's vision of a 'free 
market' economy." 3 We've seen that alternative models threatening 
the dominance of the prevailing financial establishment have 
consistently been targeted for takedown, either by speculative attack, 
economic sanctions or war. 4 Iran has repeatedly been hit with economic 
sanctions that could strangle it economically. 

How a Truly Interest-free Banking System Might Work 

While the threat of a viable interest-free banking system could be 
a covert factor in the continual war-posturing against Iran, today that 
threat remains largely hypothetical. Islamic banks typically charge 
"fees" on loans that are little different from interest. A common 
arrangement is to finance real estate purchases by buying property 
and selling it to clients at a higher price, to be paid in installments 
over time. Skeptical Islamic scholars maintain that these arrangements 
merely amount to interest-bearing loans by other names. They use 
terms such as "the usury of deception" and "the jurisprudence of 
legal tricks." 5 

One problem for banks attempting to follow an interest-free model 
is that they are normally private institutions that have to compete 
with other private banks, and they have little incentive to engage in 
commercial lending if they are taking risks without earning a 
corresponding profit. In Sweden and Denmark, however, interest- 
free savings and loan associations have been operating successfully 
for decades. These banks are cooperatively owned and are not 
designed to return a profit to their owners. They merely provide a 
service, facilitating borrowing and lending among their members. 
Costs are covered by service charges and fees. 6 

Interest-free lending would be particularly feasible if it were done 
by banks owned by a government with the power to create money, 


Chapter 42 - The Question of Interest 

since credit could be extended without the need to make a profit or 
the risk of bankruptcy from bad loans. Like in China, a government 
that did not need to worry about carrying a $9 trillion federal debt 
could afford to carry a few private bad debts on its books without 
upsetting the economy. A community or government banking service 
providing interest-free credit would just be a credit clearing agency, 
an intermediary that allowed people to "monetize" their own promises 
to repay. People would become sovereign issuers of their own money, 
not just collectively but individually, with each person determining 
for himself how much "money" he wanted to create by drawing it 
from the online service where credit transactions were recorded. 

That is what actually happens today when purchases are made 
with a credit card. Your signature turns the credit slip into a negotiable 
instrument, which the merchant accepts because the credit card 
company stands behind it and will pursue legal remedies if you don't 
pay. But the bank doesn't actually lend you anything. It just facilitates 
and guarantees the deal. (See Chapter 29.) You create the "money" 
yourself; and if you pay your bill in full every month, you are creating 
money interest-free. Credit could be extended interest-free for longer 
periods on the same model. To assure that advances of the national 
credit got repaid, national banks would have the same remedies lenders 
have now, including foreclosure on real estate and other collateral, 
garnishment of wages, and the threat of a bad credit rating for 
defaulters; while borrowers would still have the safety net of filing for 
bankruptcy if they could not pay. But they would have an easier time 
meeting their obligations, since their interest-free loans would be far 
less onerous than the 18 percent credit card charges prevalent today. 

Interest charges are incorporated into every stage of producing a 
product, from pulling raw materials out of the earth to putting the 
goods on store shelves. These cumulative charges have been estimated 
to compose about half the cost of everything we buy. 7 That means 
that if interest charges were eliminated, prices might be slashed in 
half. Interest-free loans would be particularly appropriate for funding 
state and local infrastructure projects. (See Chapter 44.) Among other 
happy results, taxes could be reduced; infrastructure and sustainable 
energy development might pay for themselves; affordable housing 
for everyone would be a real possibility; and the inflation resulting 
from the spiral of ever-increasing debt might be eliminated. 8 

On the downside, interest-free loans could create another massive 
housing bubble if not properly monitored. The current housing bubble 
resulted when monthly house payments were artificially lowered to 


Web of Debt 

the point where nearly anyone could get a mortgage, regardless of 
assets. This problem could be avoided by reinstating substantial down- 
payment and income requirements, and by shortening payout periods. 
A home that formerly cost $3,000 per month would still cost $3,000 
per month; the mortgage would just be shorter. 

Another hazard of unregulated interest-free lending is that it could 
produce the sort of speculative carry trade that developed in Japan 
after it made interest-free or nearly interest-free loans available to all. 
Investors borrowing at zero or very low interest have used the money 
to buy bonds paying higher interest, pocketing the difference; and 
these trades have often been highly leveraged, hugely inflating the 
money supply and magnifying risk. As the dollar has lost value relative 
to the yen, investors have had to scramble to repay their yen loans in 
an increasingly illiquid credit market, forcing them to sell other assets 
and contributing to systemic market failure. One solution to this 
problem might be a version of the "real bills" doctrine: interest-free 
credit would be available only for real things traded in the economy 
— no speculation, investing on margin, or shorting. (See Chapter 37.) 

What would prudent savers rely on for their retirement years if 
interest were eliminated from the financial scheme? As in Islamic 
and Old English systems, money could still be invested for a profit. It 
would just need to be done as "profit-sharing" — sharing not only in 
the profits but in the losses. In a compound-interest arrangement, the 
lender gets his interest no matter what. In fact, he does better if the 
borrower fails, since the strapped borrower provides him with a steady 
income stream at higher rates of interest than otherwise. In today's 
market, profit-sharing basically means that savers would move their 
money out of bonds and into stocks. Alternatives for taking the risk 
out of retirement are explored in Chapter 44. 

A Financial System in Which Bankers Are Public Servants 

The religious objection to charging interest is that people who have 
not labored for the money take it from those who have earned it by 
the sweat of their brows. This result could be avoided, however, 
without actually banning interest. In ancient Sumer, interest was 
collected but went to the temple, which then disbursed it to the 
community for the common good. (See Chapter 5.) A similar model 
was created by Mohammad Yunus, the Muslim professor who 
founded the Grameen Bank of Bangladesh. The Grameen Bank 


Chapter 42 - The Question of Interest 

charges interest, but at a significantly lower rate than would otherwise 
be available to poor women lacking collateral; and the interest is 
returned to the bank for their benefit as its shareholders. (See Chapter 
35.) That was also the system successfully employed in colonial 
Pennsylvania, where a public land bank collected interest and returned 
it to the provincial government to be used in place of taxes. 

Whether loans are extended interest-free or interest is returned to 
the community, community-oriented models would work best if the 
banks were publicly-owned institutions that did not need to return a 
profit. Today government-owned banks are associated with socialism, 
but they would not have raised the eyebrows of our forefathers. The 
Pennsylvania land bank was a provincially-owned institution that 
generated sufficient profits to fund the local government without taxes, 
and in this it was quite different from the modern socialist scheme. 
Even the most successful modern Western democratic socialist 
countries, including Sweden and Australia, do not eliminate taxes. 
Rather than funding their governments with profits from publicly- 
owned ventures, they rely on heavy taxes imposed on the private sector. 
Sweden developed one of the largest welfare states in Europe after 
1945, but it had few government-run industries. 9 India was off to a 
good start, but it got sucked into massive foreign debts by the engineered 
oil crisis of 1974 and a banker-manipulated Congress that took on 
unnecessary IMF debt. 10 The Australian Labor Party, while holding 
public ownership of infrastructure out as an ideal, has not had enough 
political power to put that ideal into practice, at least not lately. At 
the turn of the twentieth century, Australia did have a very successful 
publicly-owned bank, one of which Ben Franklin would have 
approved. Australia's Commonwealth Bank was a "people's bank" 
that not only issued paper money but made loans and collected interest 
on them. When private banks were demanding 6 percent interest, 
Commonwealth Bank financed the Australian government's First 
World War effort at an interest rate of a fraction of 1 percent. The 
result was to save Australians some $12 million in bank charges. After 
the First World War, the bank's governor used the bank's credit power 
to save Australians from the depression conditions in other countries. 
It financed production and home-building, and lent funds to local 
governments for the construction of roads, tramways, harbors, 
gasworks, and electric power plants. The bank's profits were paid to 
the national government and were available for the redemption of 
debt. This prosperity lasted until the bank fell to the twentieth century 
global drive for privatization. At the beginning of the twentieth 
century, Australia had a standard of living that was among the highest 


Web of Debt 

in the world; but after its bank was privatized, the country fell heavily 
into debt. By the end of the century, its standard of living had dropped 
to twenty-third. 11 

New Zealand in the 1930s and 1940s also had a government-owned 
central bank that successfully funded public projects, keeping the 
economy robust at a time when the rest of the world was languishing 
in depression. 12 In the United States during the same period, Franklin 
Roosevelt reshaped the U.S. Reconstruction Finance Corporation (RFC) 
into a source of cheap and abundant credit for developing the national 
infrastructure and putting the country back to work. 13 Besides the 
RFC and colonial land banks, other ventures in U.S. government 
banking have included Lincoln's Greenback system, the U.S. Postal 
Savings System, Frannie Mae, Freddie Mac, and the Small Business 
Administration (SBA), which oversees loans to small businesses in an 
economic climate in which credit may be denied by private banks 
because there is not enough profit in the loans to warrant the risks. 

The Myth of Government Inefficiency 

A common objection to getting the government involved in business 
is that it is notoriously inefficient at those pursuits; but Betty Reid 
Mandell, author of Selling Uncle Sam, maintains that this reputation 
is undeserved. She says it has resulted largely because the only 
enterprises left to government are those from which private enterprise 
can't make a profit. She cites surveys showing that in-house operation 
of publicly-provided services is generally more efficient than contracting 
them out, while privatizing public infrastructure for private profit has 
typically led to increased costs, inefficiency, and corruption. 14 A case 
in point is the deregulation and privatization of electricity in California, 
which met with heavy criticism as an economic disaster for the state. 15 
Complex publicly-provided services tend to break down with 
privatization, just from the complexity of contracting and supervising 
the contract. Privatization of the British rail system caused rate 
increases, rail accidents, and system breakdown, to the point that a 
majority of the British public now favors returning to government 
ownership and operation. Catherine Austin Fitts concurs, drawing 
on her experience as Assistant Secretary of HUD. She writes: 

The public policy "solution" has been to outsource government 
functions to make them more productive. In fact, this jump in 
overhead is simply a subsidy provided to private companies and 
organisations that receive thereby a guaranteed return regardless 


Chapter 42 - The Question of Interest 

of performance. We have subsidies and financing to support 
housing programs that make no economic sense except for the 
property managers and owners who build and manage it for 
layers of fees. 16 

Government services may appear to be inefficient because public 
funding is lacking to do the job properly; but this inefficiency is not 
the result of a lack of motivation among government workers caused 
by inadequate "competition." Clerks working for the government 
have to compete and perform to hold onto their jobs just as clerks 
working for private industry do. To the clerk, there is not much 
difference whether she is working for the government or for a big 
multinational corporation. It is not "her" business. Either way, she is 
just getting paid to take orders and carry them out. Beating out the 
competition by cutthroat practices is not the only way to motivate 
workers. Pride of performance, a desire for promotion and higher 
salaries, and a belief in the team project are also effective prods. Recall 
the Indian study comparing service and customer satisfaction from 
private-sector and public-sector banks, in which the government- 
owned Bank of India came out on top in all areas surveyed. 17 

Banks that are government agencies would have a number of 
practical advantages that could actually make them more efficient in 
the marketplace than their private counterparts. A government 
banking agency could advance loans without keeping "reserves." Like 
in the tally system or the LETS system, it would just be advancing 
"credit." A truly national bank would not need to worry about going 
bankrupt, and it would not need an FDIC to insure its deposits. It 
could issue loans impartially to anyone who satisfied its requirements, 
in the same way that the government issues driver's licenses to anyone 
who qualifies now. Interest-free lending might not materialize any 
time soon, but loans could be issued at an interest rate that was modest 
and fixed, returning reliability and predictability to borrowing. The 
Federal Reserve would no longer have to tamper with interest rates to 
control the money supply indirectly, because it would have direct 
control of the national currency at its source. A system of truly 
"national" banks would return to the people their most valuable asset, 
the right to create their own money. Like the monarchs of medieval 
England, we the people of a sovereign nation would not be dependent 
on loans from a cartel of private financiers. We would not need to pay 
income taxes, and we might not need to pay taxes at all ... . 


Chapter 43 

"Didn't you know water would be the end of me?" asked the Witch, 
in a wailing, despairing voice. . . . "In a few minutes I shall be all melted, 
and you will have the castle to yourself. . . . Look out - here I go!" 

- The Wonderful Wizard ofOz, 
"The Search for the Wicked Witch" 

In the happy ending to our economic fairytale, the drought of 
debt to a private banking monopoly is destroyed with the water 
of a freely-flowing public money supply. Among other salubrious 
results, we the people never have to pay income taxes again. That possi- 
bility is not just the fantasy of Utopian dreamers but is the conclusion 
of some respected modern financial analysts. One is Richard Russell, 
the investment adviser quoted earlier, whose Dow Theory Letter has 
been in publication for nearly fifty years. In his April 2005 newsletter, 
Russell observed that the creation of money is a total mystery to prob- 
ably 99 percent of the U.S. population. Then he proceeded to unravel 
the mystery in a few sentences: 

To simplify, when the US government needs money, it either 
collects it in taxes or it issues bonds. These bonds are sold to the 
Fed, and the Fed, in turn, makes book entry deposits. This "debt 
money" created out of thin air is then made available to the US 
government. But if the US government can issue Treasury bills, 
notes and bonds, it can also issue currency, as it did prior to the 
formation of the Federal Reserve. If the US issued its own money, 


Chapter 43 - Bailout, Buyout, or Corporate Takeover? 

that money could cover all its expenses, and the income tax wouldn't 
be needed. So what's the objection to getting rid of the Fed and 
letting the US government issue its own currency? Easy, it cuts 
out the bankers and it eliminates the income tax. 1 

In a February 2005 article titled "The Death of Banking and Macro 
Politics," Hans Schicht reached similar conclusions. He wrote: 

If prime ministers and presidents would only be blessed with 
the most basic knowledge of the perversity of banking, they 
would not go onto their knees to the Central Banker and ask His 
Highness for loans .... With a little bit of brains they would 
expropriate all banking institutions .... Expropriation would bring 
enough money into the national treasuries for the people not to have 
to pay taxes for years to come. 2 

"Expropriation," however, means "to deprive of property," and 
that is not the American way. At least, it isn't in principle. The Rob- 
ber Barons routinely deprived their competitors of property, but they 
did it by following accepted business practices: they purchased the 
property on the open market in a takeover bid. Their sleight of hand 
was in the funding used for the purchases. They had their own affili- 
ated banks, which could "lend" money into existence with an account- 
ing entries. 

If the banking cartels can do it, so can the federal government. 
Commercial bank ownership is held as stock shares, and the shares 
are listed on public stock exchanges. The government could regain 
control of the national money supply by simply buying up some prime 
bank stock at its fair market price. Buying out the entire banking 
industry would not be necessary, since the depository and credit needs 
of consumers could be served by a much smaller banking force than is 
prowling the capital markets right now. The recycling of funds as 
loans could be left to private banks and those non-bank financial 
institutions that are already serving a major portion of the loan market. 
Although buying out the whole industry would not be necessary, it 
might be the equitable thing to do, since if the government were to 
take back the power to create money from the banks, bank stock could 
plummet. Indeed, if commercial banks could no longer make loans 
with accounting entries, the banks' shareholders would probably vote 
to be bought out if given the choice. 

Assume for purposes of argument, then, that Congress had decided 
to reclaim the whole commercial banking industry, as an assortment 
of populist writers have suggested. What would that cost on the open 


Web of Debt 

market? At the end of 2004, the total book value (assets minus liabilities) 
of all U.S. commercial banks was reported at $850 billion. 3 "Book 
value" is what the shareholders would receive if the banks were 
liquidated and the shareholders were cashed out for exactly what the 
banks were worth. Shares trade on the stock market at substantially 
more than this figure, but the price is usually no more than a generous 
two times "book." Assuming that formula, around $1.7 trillion might 
be enough to purchase the whole U.S. commercial banking industry. 
Too much for the government to pay? 

Not if it were to create the money with accounting entries, the 
way banks do now. 

But wouldn't that be dangerously inflationary? 

Not if Congress were to wait for a deflationary crisis; and we've 
seen that such a crisis is now looming on the horizon. The next 
correction in housing prices is expected to shrink the money supply by 
about $2 trillion. Fed Chairman Ben Bernanke suggested in 2002 that 
the government could counteract a major deflationary crisis by simply 
printing money and buying real assets with it. (See Chapter 40.) 
Buying the banking industry for $1.7 trillion in new Greenbacks could 
be just what the good doctor ordered. 

Bailout, Buyout, or FDIC Receivership? 

The government could buy out the banks' shareholders, but it 
wouldn't necessarily have to. Enough bank branches to serve the 
public's needs might be picked up by the FDIC for free, just by 
conducting an independent audit of the big derivative banks and 
putting any found to be insolvent into receivership. 

Recall Murray Rothbard's contention that the whole commercial 
banking system is bankrupt and belongs in receivership. (Chapter 
34.) Banks owe depositors many times the amount of money they 
have on "reserve." They have managed to avoid a massive run on the 
banks by lulling their depositors into a false sense that all is well, using 
devices such as FDIC deposit insurance and a "reserve system" that 
allows banks to borrow money created out of nothing from the Federal 
Reserve. But that bailout system is provided at taxpayer expense. By 
rights, said Rothbard, the whole banking system should be put into 
receivership and the bankers should be jailed as embezzlers. 

If the taxpayers were to withdraw the taxpayer-funded props 
holding up a bankrupt banking system, the banks, or at least some of 
them, could soon collapse of their own weight; and the first to go 


Chapter 43 - Bailout, Buyout, or Corporate Takeover? 

would probably be the big derivative banks that have been called 
"zombie banks" - banks that are already bankrupt and are painted 
with a veneer of solvency by a team of accountants adept at "creative 
accounting." Insolvent banks are dealt with by the FDIC, which can 
proceed in one of three ways. It can order a payout, in which the bank 
is liquidated and ceases to exist. It can arrange for a purchase and 
assumption, in which another bank buys the failed bank and assumes 
its liabilities. Or it can take the bridge bank option, in which the FDIC 
replaces the board of directors and provides the capital to get it running 
in exchange for an equity stake in the bank. 4 An "equity stake" means 
an ownership interest: the bank's stock becomes the property of the 

The bridge bank option was taken in 1984, when Chicago's 
Continental Illinois became insolvent. Continental Illinois was the 
nation's seventh largest bank, and its insolvency was the largest bank 
failure that had ever occurred in the United States. Ed Griffin writes: 

Federal Reserve Chairman Volcker told the FDIC that it 
would be unthinkable to allow the world economy to be ruined 
by a bank failure of this magnitude. So, the FDIC assumed $4.5 
billion in bad loans and, in return for the bailout, took 80% 
ownership of the bank in the form of stock. In effect, the bank was 
nationalized .... The United States government was now in the 
banking business. 

. . . Four years after the bailout of Continental Illinois, the 
same play was used in the rescue of BankOklahoma, which was 
a bank holding company. The FDIC pumped $130 million into 
its main banking unit and took warrants for 55% ownership. . . 
By accepting stock in a failing bank in return for bailing it out, the 
government had devised an ingenious way to nationalize banks 
without calling it that. 5 

The FDIC sold its equity interest in Continental Illinois after the 
bank got back on its feet in 1991, but the bank was effectively 
nationalized from 1984 to 1991. Griffin decries this result as being 
antithetical to capitalist notions; but as William Jennings Bryan 
observed, banking is the government's business, by constitutional 
mandate. The right and the duty to create the national money supply 
were entrusted to Congress by the Founding Fathers. If Congress is 
going to take back the power to create money, it will have to take 
control of the lending business, since over 97 percent of the money 
supply is now created as commercial loans. 


Web of Debt 

As Dave Lewis observed, in some sense the big banks considered 
"too big to fail" are already nationalized, since their survival depends 
on a system of taxpayer-funded bailouts. (See Chapter 34.) If tax- 
payer money is keeping the ship from sinking, the taxpayers are en- 
titled to step in and take the helm. Banking institutions supported by 
taxpayer money can and should be made public institutions operated 
for the benefit of the taxpayers. 

Some Choice Bank Stock Ripe for FDIC Plucking? 

Continental Illinois may not be the largest U.S. bank to have been 
bailed out from bankruptcy. We've seen evidence that Citibank be- 
came insolvent in 1989 and was quietly bailed out with the help of the 
Federal Reserve, and that JPMorgan Chase (JPM) followed suit in 2002. 
(Chapters 33 and 34.) These are the country's two largest banks, and 
they are the banks that are the most perilously over-exposed in the 
massive derivatives bubble. Recall the 2006 report by the Office of the 
Comptroller of the Currency, finding that 97 percent of U.S. bank- 
held derivatives are in the hands of just five banks; and that the first 
two banks on the list are JPM and Citibank. According to Martin 
Weiss in a November 2006 newsletter: 

The biggest [derivatives] player, JPMorgan Chase, is a party to 
$57 trillion in notional value of derivatives. Its total credit 
exposure adds up to $660 billion, a stunning 748% of the bank's 
risk-based capital. In other words, for every dollar of its net 
worth, JPMorgan Chase is risking $7.48 in derivatives. All it 
would take is for 13.3% of its derivatives to go bad . . . and 
JPMorgan' s capital would be wiped out, gone. . . . Citibank isn't 
far behind - with $4.24 at risk for every dollar of capital, more 
than double what it was just a few years ago. 6 

These two banks are prime candidates for receivership, and the 
FDIC might not even have to wait for a massive derivatives crisis in 
order to proceed. It might just need to take a close look at the banks' 
books. JPM and Citibank were both defendants in the Enron scandal, 
in which they were charged with fraudulently cooking their books to 
make things look rosier than they were. To avoid judgment, they 
wound up paying $300 million to settle the suits; but while a settlement 
avoids having to admit liability, evidence in the case clearly showed 
fraudulent activities. 7 Banks with a record of engaging in such tactics 
could still be engaging in them. A penetrating look at their books 
might confirm that their complex derivatives schemes were illegal 


Chapter 43 - Bailout, Buyout, or Corporate Takeover? 

pyramid schemes concealing insolvency, as critics have charged. (See 
Chapter 34.) If the banks are insolvent, they belong in receivership. 

JPM and Citibank have many branches and an extensive credit 
card system. Recall that JPM now issues the most Visas and 
MasterCards of any bank nationwide, and that it holds the largest 
share of U.S. credit card balances. If just these two banks were acquired 
by the government in receivership, they might be sufficient to service 
the depository, check clearing, and credit card needs of the citizenry. 
That result would also make a very satisfying ending to our story. 
JPM and Citibank are the money machines of the empires of Morgan 
and Rockefeller, the Robber Barons whose henchmen plotted at Jekyll 
Island to impose their Federal Reserve scheme on the American people. 
They induced William Jennings Bryan to endorse the Federal Reserve 
Act by leading him to believe that it provided for a national money 
supply issued by the government rather than by private banks. It 
would only be poetic justice for these massive banking conglomerates 
to become truly "national" banking institutions, serving the public 
interest at last. 

Time for an Audit of the Banks and a Tax on Derivatives? 

Even if the mega-banks (or some of them) are already bankrupt, 
we might not hear about it without an independent Congressional 
audit. John Hoefle writes, "Major financial crises are never announced 
in the newspapers but are instead treated as a form of national security 
secret, so that various bailouts and market-manipulation activities can 
be performed behind the scenes." The bailouts are primarily conducted 
by the Federal Reserve, a private corporation answerable to the private 
banks that are its real owners. Hoefle argues that Congress delegated 
the money-creating power to the Federal Reserve in violation of its 
Constitutional mandate, making the Fed's activities illegal. He 

This is not an academic question, as the Fed is actively involved 
in looting the American population for the benefit of giant U.S. 
and global financial institutions, and the global casino. Few 
Americans have any idea the extent to which the Fed and its system 
reach into their pockets on a daily basis, and the extent to which their 
standard of living has been eroded by the financier-led 
deindustrialization of the United States. . . . [N]ot only do we suffer 
from an inadequate infrastructure, but we have lost the benefits 
of those breakthroughs which would have occurred, the 


Web of Debt 

technologies which would have been developed, had the 
parasites not taken over the economy. It is the failure to push 
back the boundaries of science that is responsible for most of our 
problems today. 8 

In order to bring the largely-unreported derivatives scheme into 
public view and under public control, Hoefle favors a tax on all 
derivative trades. This form of tax is called a "Tobin tax," after 
economist James Tobin, who received a Bank of Sweden Prize in 
Economics in 1981. Hoefle notes that even a very modest tax of one- 
tenth of one percent would bring derivative trades out into the open, 
allowing them to be traced and regulated; and because derivative 
trading is in such high volume, the tax would have the further benefit 
of generating significant revenue for the government. 

Dean Baker of the Center for Economic and Policy Research in 
Washington is another advocate of a tax on derivatives. He points out 
that financial transactions taxes have been successfully implemented 
in the past and have often raised substantial revenue. Until recently, 
every industrialized nation imposed taxes on trades in its stock mar- 
kets; and several still do. Until 1966, the United States placed a tax of 
0.1 percent on shares of stock when they were first issued, and a tax 
of 0.04 percent when they were traded. A tax of 0.003 percent is still 
imposed on stock trades to finance SEC operations. 9 

Baker notes that the vast majority of stock trades and other finan- 
cial transactions are done by short term traders who hold assets for 
less than a year and often for less than a day. Unlike long-term stock 
investment, these trades are essentially a form of gambling. He writes, 
"When an investor buys a share of stock in a company that she has 
researched and holds it for ten years, this is not gambling. But when 
a day trader buys a stock at 2:00 P.M. and sells it at 3:00 P.M., this is 
gambling. Similarly, the huge bets made by hedge funds on small 
changes in interest rates or currency prices is a form of gambling." 
When poor and middle income people gamble, they usually engage in 
one of the heavily taxed forms such as buying lottery tickets or going 
to the race track; but wealthier people who gamble in the stock mar- 
ket escape taxation. Baker argues that a tax on derivative trades would 
only be fair, equalizing the rules of the game: 

Insofar as possible, taxes should be shifted away from 
productive activity and onto unproductive activity. In 
recognition of this basic economic principle, the government . . . 
already taxes most forms of gambling quite heavily. For example, 


Chapter 43 - Bailout, Buyout, or Corporate Takeover? 

gambling on horse races is taxed at between 3.0 and 10.0 percent. 
Casino gambling in the states where it is allowed is taxed at 
rates between 6.25 and 20.0 percent. State lotteries are taxed at 
a rate of close to 40 percent. Stock market trading is the only 
form of gambling that largely escapes taxation. This is doubly 
inefficient. The government has no reason to favor one form of 
gambling over others, and it is far better economically to tax 
unproductive activities than productive ones. 

. . . From an economic standpoint, the nation is certainly no 
better off if people do their gambling on Wall Street rather than 
in Atlantic City or Las Vegas. In fact, there are reasons to believe 
that the nation is better off if people gamble in Las Vegas, since 
gambling on Wall Street can destabilize the functioning of 
financial markets. Many economists have argued that 
speculators cause the price of stocks and other assets to diverge 
from their fundamental values. 10 

A tax on short-term trades would impose a significant tax on specu- 
lators while leaving long-term investors largely unaffected. Accord- 
ing to Baker, a tax of as little as 0.25 percent imposed on each pur- 
chase or sale of a share of stock, along with a comparable tax on the 
transfer of other assets such as bonds, options, futures, and foreign 
currency, could easily have netted the Treasury $120 billion in 2000. 
By December 2007, according to the Bank for International Settlements, 
derivatives tallied in at $681 trillion. A tax of 0.25 percent on that 
sum would have added $2.7 trillion to the government's coffers. 

Solving the Derivatives Crisis 

A derivatives tax might do more than just raise money for the 
government. Hoefle maintains that it could actually kill the deriva- 
tives business, since even a very small tax leveraged over many trades 
would make them unprofitable. Killing the derivatives business, in 
turn, could propel some very big banks into bankruptcy; but the fleas' 
loss could be the dog's gain. The handful of banks in which 97 per- 
cent of U.S. bank-held derivatives are concentrated are the same banks 
that are engaging in vulture capitalism, bear raids through collusive 
short selling, and a massive derivatives scheme that allows them to 
manipulate markets and destroy businesses. A tax on derivatives could 
expose these corrupt practices and bring both the schemes and the 
culpable banks under public control. 


Chapter 44 

The strange creatures set the travelers down carefully before the 
gate of the City . . . and then flew swiftly away .... 
"That was a good ride," said the little girl. 
"Yes, and a quick way out of our troubles," replied the Lion. 

- The Wonderful Wizard ofOz, 
"The Winged Monkeys" 

A tax on derivatives could be a useful tool, but the ideal govern- 
ment would be one that was self-sustaining, without imposing 
either taxes or a mounting debt on its citizens. As Richard Russell 
observed, if the U.S. issued its own money, that money could cover all 
its expenses, and taxes would not be necessary. If the Federal Reserve 
were made what most people think it now is - an arm of the federal 
government - and if it had been vested with the exclusive authority to 
create the national money supply in all its forms, the government would 
have access to enough money to spend on anything it needed or 
wanted. The obvious problem with that "quick fix" is that it would 
eventually produce serious inflation, unless the money were siphoned 
back out of the economy in some way. The questions considered in 
this chapter are: 

• How much new money could the government put into the economy 
annually without creating dangerous price inflation? 

• Would that be enough to replace income taxes? How about other 

• Would it be enough to fund new and needed projects not currently 
in the federal budget, such as sustainable energy development, 
restoration of infrastructure, and affordable public housing? 


Chapter 44 - The Quick Fix 

No More Income Taxes! 

Assume that the Federal Reserve had used its new Greenback- 
issuing power to buy back the entire outstanding federal debt, and 
that it had acquired enough bank branches (either by purchase or by 
FDIC takeover in receivership) to service the depository and credit 
needs of the public. What impact would those alterations have on the 
federal income tax burden? To explore the possibilities, we'll use U.S. 
data for FY 2005 (the fiscal year ending September 2005), the last year 
for which M3 was reported: 

• Total individual income taxes in FY 2005 came to $927 billion. 

• Taxpayers paid $352 billion in interest that year on the federal 
debt. If the debt had been paid off, this interest could have been 
cut from the national budget, reducing the tax burden by that sum. 1 

• Total assets in the form of bank credit for all U.S. commercial banks 
in FY 2005 were reported at $7.4 trillion. 2 Assuming an average 
collective interest rate on bank loans of about 5 percent, 
approximately 370 billion dollars were thus paid in interest that 
year. If roughly half this sum had gone to a newly-formed national 
banking system — for loans made at the federal funds rate to private 
lending institutions, interest on credit card debt, loans to small 
businesses, and so forth — the government could have earned 
around $185 billion in interest in FY 2005. 

Adding these two adjustments together, the public tax bill might 
have been reduced by around $537 billion in FY 2005. Deducting this 
sum from $927 billion leaves $390 billion. This is the approximate 
sum the government would have had to generate in new Greenbacks 
to eliminate federal income taxes altogether in FY 2005. 

What would adding $390 billion do to the money supply and 
consumer prices? In 2005, M3 was $9.7 trillion. Adding $390 billion 
would have expanded M3 by only 4 percent — Milton Friedman's 
modest target rate, and far less than the money supply actually grew in 
2006. That was the year the Fed quit reporting M3, but the figures 
have been calculated privately by other sources. Economist John 
Williams has a website called "Shadow Government Statistics," which 
exposes and analyzes the flaws in current U.S. government data and 
reporting. He states that in July 2006, the annual growth in M3 was 
over 9 percent. 3 We've seen that this growth must have come from fiat 
money created as loans by the Federal Reserve and the banks. 4 Thus if 
new debt-free Greenbacks had been issued by the Treasury instead, 


Web of Debt 

inflation of the money supply could actually have been reduced - from 
9 percent to a modest 4 percent - without cutting government programs 
or adding to a burgeoning federal debt. 

Horn of Plenty: Avoiding Inflation 
by Increasing Supply and Demand Together 

New Greenbacks in the sum of $390 billion dollars would have 
been enough to eliminate income taxes, but according to Keynes, the 
government could have issued quite a bit more than that without 
dangerously inflating prices. He said that if the funds were used to 
put the unemployed to work making new goods and services, new 
currency could safely be added up to the point of full employment 
without creating price inflation. The gross domestic product (GDP) 
would just increase by the value of the newly-made goods and services, 
keeping supply and demand in balance. 

How much is the U.S. work force under-employed today? In the 
first half of 2006, the official unemployment rate was 4.6 percent; but 
critics said the figure was low, because it included only people applying 
for unemployment benefits. It did not include those who were no 
longer eligible for benefits, those who had given up, or those whose 
skills and education were under-utilized - people working part-time 
who wanted to work full-time, engineers working as taxi drivers, 
computer programmers working as store clerks, and so forth. 
According to Williams' "Shadow Government Statistics" website, the 
real U.S. unemployment figure in early 2006 was a full 12 percent. 5 

The reported GDP in 2005 was $12.5 trillion. If Williams' 
unemployment figure is correct, $12.5 trillion represented only 88 
percent of the country's productive capacity in 2005. Extrapolating 
upwards, 100 percent productive capacity would have generated a 
GDP of $14.2 trillion, or $1.7 trillion more than was actually produced 
in 2005. That means another $1.7 trillion in new Greenbacks could have 
been spent into the economy for productive purposes in 2005 without 
creating significant price inflation. 

What could you do with $1.7 trillion ($1,700 billion)? According 
to a United Nations report, in 1995 a mere $80 billion added to existing 
resources would have been enough to cut world poverty and hunger 
in half, achieve universal primary education and gender equality, 
reduce under-five mortality by two-thirds and maternal mortality by 
three-quarters, reverse the spread of HIV/ AIDS, and halve the 
proportion of people without access to safe water world-wide. 6 For 


Chapter 44 - The Quick Fix 

comparative purposes, here are some typical U.S. government outlays: 
$76 billion went for education in FY 2005, $26.6 billion went for natural 
resources and the environment, and $69.1 billion went for veteran's 
benefits. Under our projected scenario, these and other necessary 
services could have been expanded and many others could have been 
added, while at the same time eliminating federal income taxes and the 
federal debt, without creating dangerous inflation. 

A Non-inflationary National Dividend 
or Basic Income Guarantee? 

Other theorists have gone further than Keynes. Richard Cook is a 
retired federal analyst who served at the U.S. Treasury Department 
and now writes and lectures on monetary policy. He notes that in 
2006, the U.S. Gross Domestic Product came to $12.98 trillion, while 
the total national income came to only $10.23 trillion; and at least 10 
percent of that income was reinvested rather than spent on goods 
and services. Total available purchasing power was thus only about 
$9.21 trillion, or $3.77 trillion less than the collective price of goods 
and services sold. Where did consumers get the extra $3.77 trillion? 
They had to borrow it, and they borrowed it from banks that created it 
with accounting entries. If the government were to replace this bank- 
created money with debt-free Greenbacks, the total money supply 
would remain unchanged. That means a whopping $3.77 trillion in 
new government-issued money might be fed into the economy without 
increasing the inflation rate. 7 

This opens another rainbow-hued dimension of possibilities. What 
could the government do with $3.77 trillion? In a 1924 book called 
Social Credit, C. H. Douglas suggested that government-issued money 
could be used to pay a guaranteed basic income for all. Richard Cook 
proposes a national dividend of $10,000 per adult and $5,000 per 
dependent child annually. 8 The U.S. population was about 303 million 
in 2007, of whom 27.4 percent were under age 20. That works out to 
$2,200 billion for adults and $415 billion for children, or $2,615 billion 
($2,615 trillion) to provide a basic security blanket for everyone. If 
$3.77 trillion in Greenback dollars were issued to fill the gap between 
GDP and purchasing power, and $2,615 trillion of this money were 
distributed among the population, the government would still have $1.55 
trillion left over — ample to satisfy its budgetary needs. 

The concept of a national dividend is interesting but controversial. 
On the one hand, the result could be a class of drones willing to live at 
subsistence level to avoid work. On the other hand, a national 


Web of Debt 

dividend would be a boon to artists and inventors willing to live 
frugally in order to explore their art. During the culturally rich 
Renaissance, art, literature and science were furthered by a leisure 
class favored by inheritance. A national dividend would give that 
birthright to all. Meanwhile, most people desire a lifestyle beyond 
mere subsistence and would no doubt be willing to pursue productive 
employment to acquire it. 

Another proposal favored by a number of economists is a basic 
income guarantee, a sum of money sufficient to assure that no citizen's 
income falls below some minimum level. The difference, says Cook, is 
that a national dividend would be tied to national production and 
consumption data and might vary from year to year. A guaranteed 
minimum income would be a fixed figure, paid without complicated 
paperwork or qualifying tests. 

However Congress decides to spend the money, the important 
point here is that the government might be able to issue and spend as 
much as $3.77 trillion into the economy without creating 
hyperinflation — perhaps not all at once, but at least over time. The 
money would merely make up for the shortfall between GDP and 
purchasing power, gradually replacing the debt-money created as 
loans by private banks. As unemployed and under-employed people 
acquired incomes they could live on, they would no longer need to 
take out loans at exorbitant interest rates to pay their bills. Home 
buyers with money to spare would pay down their mortgages, and 
fewer "sub-prime" borrowers would be induced to acquire new debt, 
since aggressive lending tactics would have disappeared along with 
the fractional reserve banking system that made them profitable. 
Meanwhile, a tax imposed on derivatives could put a brake on the 
exploding derivatives bubble and its accompanying debt burden; and 
if the big derivative banks were put into FDIC receivership, the 
derivative Ponzi scheme might be carefully unwound, liquidating large 
amounts of "virtual" debt with it. As these sources of debt-money 
shrank, there would be increasing room for expanding the money 
supply by funding public projects with newly-issued Greenbacks. 

A Solution to the Housing Crisis? 

Among other possible uses for this $3.77 trillion in new-found 
capital might be to salvage the distressed housing market. Estimates 
are that the current subprime debacle and ARM resets could throw 
mortgages valued at $1 trillion into default, either because the 


Chapter 44 - The Quick Fix 

borrowers can't afford the payments or because they have no incentive 
to keep paying on homes worth less than is owed on them. 9 One 
proposed solution is to slow foreclosures by imposing a freeze on 
interest rates, keeping ARM rates from going higher. But that would 
violate the "sanctity of contracts," forcing unwary buyers of mortgage- 
backed securities to bear the loss on investments that had been stamped 
"triple-A" by bank-funded rating agencies. By rights, the banks 
devising these dubious investment vehicles to get loans off their books 
should be held liable; but the banks are already in serious financial 
trouble and would be hard-pressed to find an extra trillion to 
compensate the victims. If the securities holders sue the banks for 
restitution, even the hardiest banks could go bankrupt. 10 

Where, then, can a deep pocket be found to set things right? Today 
the world's central banks are extending billions of dollars in computer- 
generated money to bail out their cronies, but these loans are just 
buying time, without restoring homeowners to their homes or 
preventing abandoned neighborhoods from deteriorating. 11 So who is 
left to save the day? If Congress were to issue $3.77 trillion to fill the 
gap between purchasing power and GDP, it could use one quarter of 
this money to buy defaulting mortgages from MBS holders, and it 
would still have plenty left over to meet its budget without levying 
income taxes. Adding a potential $1.7 trillion or more from a tax on 
derivatives would provide ample money for other programs as well. 
After reimbursing the defrauded MBS holders, Congress could dispose 
of the distressed properties however it deemed fair. To avoid either 
giving defaulting homeowners a windfall or turning them out into 
the streets, one possibility might be to rent the homes to their current 
occupants at affordable prices, at least until some other equitable 
solution could be found. The rents could then be cycled back to the 
government, helping to drain excess liquidity from the money supply. 

How to Keep the Economic Bathtub from Overflowing 

That segues into another way of viewing the inflation problem: 
the government could create all the new money it needed or wanted, 
if it had ways to drain the economic bathtub by recycling the funds 
back to itself. Instead of issuing new money the next time around, it 
could just spend these recycled funds, keeping the money supply stable. 
The usual way to draw money back to the Treasury is through taxes. 
Indeed, it has been argued that governments must tax in order to 
siphon excess money out of the system. But the Pennsylvania 


Web of Debt 

experience showed that inflation would not result if the government 
lent new money into the economy, since the money would be drawn 
back out when the debt was repaid; and new money spent into the 
economy could be recycled back to the government in the form of 
interest due on loans and fees for other public services. 

A more equitable and satisfying solution than taxing the people 
would be for the government to invest in productive industries that 
returned income to the public purse. Affordable public housing that 
generated rents would be one possibility. The development of 
sustainable energy solutions (wind, solar, ocean wave, geothermal) 
are other obvious examples. Unlike scarce oil resources that are non- 
renewable and come from a plot of ground someone owns, these natural 
forces are inexhaustible and belong to everyone; and once the necessary 
infrastructure is set up, no further investment is necessary beyond 
maintenance to keep these energy generators going. They are perpetual 
motion machines, powered by the moon, the tides and the weather. 
Wind farms could be set up on publicly-owned lands across the 
country. Denmark, the leading wind power nation in the world, today 
satisfies 20 percent of its electricity needs with clean energy produced 
at Danish wind farms. Wave energy can average 65 megawatts per 
mile of coastline in favorable locations, and the West Coast of the 
United States is more than 1,000 miles long. The government could 
charge a reasonable fee to users for this harnessed energy. 

Those are all possibilities for recycling excess liquidity out of the 
economy, but today the focus is on getting liquidity into the financial 
system. Major deflationary forces are now threatening to shrink the 
money supply into a major depression, unless the federal government 
turns on the liquidity spigots and pumps new money in. We've seen 
that the money supply could contract by $1.7 trillion or more just 
from the next correction in the housing market; and when the 
derivatives bubble collapses, substantially more debt-money will 
disappear. The Federal Reserve reports that the fastest-growing portion 
of the U.S. debt burden is in the "financial sector" (meaning mainly 
the banking sector), which was responsible in 2005 for $12.5 trillion in 
debt. This explosive growth is attributed largely to speculation in 
derivatives, which are highly leveraged. The buyer of a derivative 
might, for example, put up 5 percent while a bank loan provides the 
rest. The debt ratio of the financial sector zoomed from a mere 5 percent 
of the economy's national income in 1957 to 126 percent in 2005, a 
growth rate 23 times greater than general economic growth. 12 In 2006, 
only 5 major U.S. banks held 97 percent of derivatives, including the 
"zombie" banks that were already bankrupt and were being propped 


Chapter 44 - The Quick Fix 

up by manipulative market intervention. The whole edifice is built on 
sand; and when it collapses, the masses of debt-money it created will 
vanish with it in the waves, massively deflating the money supply, 
leaving plenty of room for the government to add money back in. 

A Helping Hand to State and Local Governments 

In the interest of preserving a single national currency, state and 
local governments would not be able to issue new Greenbacks to fund 
their programs (although they could issue other forms of credit, such 
as tax credits for fuel efficiency; see Chapter 36). However, the federal 
government could extend its largesse to state and local governments 
by offering them interest-free loans for worthy projects. That is what 
Jacob Coxey proposed when he took to the streets in the 1890s: "non- 
interest-bearing bonds" to fund local public projects, to be issued by 
the local government and pledged to the federal government in 
exchange for federally-issued Greenback dollars. 

In the 1990s, citizen activist Ken Bohnsack took to the streets again, 
traveling the country for a decade recruiting scores of public bodies to 
pass resolutions asking Congress for "sovereignty loan" legislation that 
echoed Coxey' s plan. Under Bohnsack' s proposed bill, the govern- 
ment would use its sovereign right to create money to make interest- 
free loans to local governments for badly needed infrastructure projects. 
The legislation was not passed, but Bohnsack, unlike Coxey, at least 
got up the Capitol steps and in the door. In 1999, his proposal became 
the State and Local Government Empowerment Act, introduced by 
Representative Ray LaHood and co-sponsored by Dennis Kucinich 
and Barbara Lee among others. 13 

Similar proposals for using interest-free national credit to fund 
infrastructure and sustainable energy development are being urged 
by a variety of money reform groups around the world, including the 
New Zealand Democratic Party for Social Credit, the Canadian Action 
Party, the Bromsgrove Group in Scotland, the Forum for Stable 
Currencies in England, the London Global Table, and the American 
Monetary Institute. 14 Reform advocates note that more money is often 
paid in interest for local projects than for labor and materials, making 
public projects unprofitable that might otherwise have paid for 
themselves. In The Modern Universal Paradigm, Rodney Shakespeare 
gives the example of the Humber Bridge, which was built in the UK 
at a cost of £98 million. Every year since the bridge opened in 1981, it 


Web of Debt 

has turned an operating profit; that is, its running costs (basically 
repair, maintenance and staff salaries) have been exceeded by the 
fees it receives from travelers crossing the River Humber. But by the 
time the bridge opened in 1981, interest charges had driven its cost 
up to £151 million; and by 1992, the debt had shot up to an alarming 
£439 million. The UK government was forced to intervene with 
sizeable grants and writeoffs to save the local residents from bearing 
the brunt of these costs. If the bridge had been financed with interest- 
free government-issued money, interest charges could have been 
avoided, and the bridge could have funded itself. 15 

State and local governments are good credit risks and do not need 
the prod of interest charges to encourage them to make timely payments 
on their loans. To discourage local officials from borrowing "free" 
money just to speculate with it, the "real bills" doctrine could be 
applied: expenditures could only be for real goods and services — no 
speculative betting, no investing on margin, no shorting. (See Chapter 
37.) A strict repayment schedule could also be imposed. 

How would these loans be repaid? The money could come from 
taxes; but again, a more satisfying solution is for local governments to 
raise revenue through fee-generating enterprises of various types, turn- 
ing local economies into the sort cooperative profit-generating endeavors 
implied in the term "Common Wealth." 

A National Dividend from Government Investments? 

The government may be a profit-generating enterprise already. 
So says Walter Burien, an investment adviser and accountant who 
has spent many years peering into government books. He notes that 
the government is composed of 54,000 different state, county, and 
local government entities, including school districts, public authorities, 
and the like; and that all of them keep their financial assets in liquid 
investment funds, bond financing accounts and corporate stock 
portfolios. The only income that must be reported in government 
budgets is that from taxes, fines and fees; but the stock holdings of 
government entities can be found in official annual reports known as 
CAFRs (Comprehensive Annual Financial Reports) which must be 
filed with the federal government by local, county and state 
governments. According to Burien, these annual reports show that 
virtually every U.S. city, county, and state has vast amounts of money 
stashed away in surplus funds, with domestic and international stock 


Chapter 44 - The Quick Fix 

holdings collectively totaling trillions of dollars. 16 

Some of these stock holdings are pure surplus held as "slush funds" 
(funds raised for undesignated purposes). Others belong to city and 
county employees as their pension funds. Unlike the federal Social 
Security fund, which must be invested in U.S. government securities, 
the funds in state and local government pension programs can be 
invested in anything - common stock, bonds, real estate, derivatives, 
commodities. Where Social Security depends on taxing future 
generations, state and local retirement systems can invest in assets 
that are income-producing, making them self-sufficient. The slush 
funds that represent "pure surplus," says Burien, have been kept 
concealed from taxpayers, even as taxes are being raised and citizens 
are being told to expect fewer government services. He maintains 
that with prudent government management, not only could taxes be 
abolished but citizens could start receiving dividend checks. This is 
already happening in Alaska, where oil investments have allowed the 
state to give rebates to taxpayers (around $2,000 per person in 2000). 17 

Burien's thesis is controversial and would take some serious 
investigation to be substantiated, but combined with allegations by 
Catherine Austin Fitts and others that trillions of dollars have simply 
been "lost" to "black ops" programs, it raises tantalizing possibilities. 
The government may be far richer than we know. An honest 
government truly intent on providing for the general welfare might 
find the funds for all sorts of programs that are sorely needed but 
today are considered beyond the government's budget, including 
improved education, environmental preservation, universal health 
coverage, restoration of infrastructure, independent medical research, 
and alternative energy development. Roger Langrick concludes: 

With computerization, robotics, advances in genetics and food 
growing, we have the potential to turn the planet into a sustainable 
ecosystem capable of supporting all. . . . This is not a time to be 
saddled with an 18th century money system designed around the 
endless rape of the planet, [one] based on the robber baron 
mentality and flawed with Unrepayable Debt. ... A new monetary 
system with enough government control to ensure funding of vital issues 
could unlock the creative potential of the entire nation. 18 


Chapter 45 

"Remember, my fine friend, a heart is not judged by how much you 
love, but by how much you are loved by others. " 

- The Wizard ofOz to the Tin Woodman, MGMfilm 

In the nineteenth century, the corporation was given the 
legal status of a "person" although it was a person without heart, 
incapable of love and charity. Its sole legal motive was to make money 
for its stockholders, ignoring such "external" costs as environmental 
destruction and human oppression. The U.S. government, by con- 
trast, was designed to be a social organism with heart. The Founding 
Fathers stated as their guiding principles that all men are created equal; 
that they are endowed with certain inalienable rights, including life, 
liberty and the pursuit of happiness; and that the function of govern- 
ment is to "provide for the general welfare." 

If the major corporate banking entities that are now in control of 
the nation's money supply were made agencies of the U.S. govern- 
ment, they could incorporate some of these humanitarian standards 
into their business models; and one important humanitarian step these 
public banks would be empowered to take would be to forgive unfair 
and extortionate Third World debt. Most Third World debt today is 
held by U.S.-based international banks. 1 If those banks were made 
federal agencies (either by purchasing their stock or by acquiring them 
in receivership), the U.S. government could declare a "Day of Jubilee" 
— a day when oppressive Third World debts were forgiven across the 
board. The term comes from the Biblical Book of Leviticus, in which 


Chapter 45- Government With Heart 

Jehovah Himself, evidently recognizing the mathematical impossibil- 
ity of continually collecting debts at interest compounded annually, 
declared a day to be held every 49 years, when debts would be for- 
given and the dispossessed could return to their homes. 

Unlike when Jehovah did it, however, a Day of Jubilee declared by 
the U.S. government would not be an entirely selfless act. If the United 
States is going to pay off its international debts with new Greenbacks, 
it is going to need the goodwill of the world. Forgiving the debts of 
our neighbors could encourage them to forgive ours. Other countries 
have no more interest in seeing the international economy collapse 
than we do; but if they are "spooked" by the market, they could rush 
to dump their dollars along with everyone else, bringing the whole 
shaky debt edifice down. Forgiving Third World debt could show our 
good intentions, quell market jitters, and get everyone on the same 
page. Our shiny new monetary scheme, rather than appearing to be 
more sleight of hand, could unveil itself as a millennial model for show- 
ering abundance everywhere. 

Forgiving Third World debt could have a number of other impor- 
tant benefits, including a reduction in terrorism. In a 2004 book called 
The Debt Threat: How Debt Is Destroying the Developing World and 
Threatening Us All, Noreena Hertz notes that "career terrorists" are 
signing up for that radical employment because it pays a salary when 
no other jobs are available. Relieving Third World debt would also 
help protect the global environment, which is being destroyed piece 
by piece to pay off international lenders; and it could help prevent the 
spread of diseases that are being bred in impoverished conditions 

The United States has actually been looking for a way to cancel 
Third World debt. It just hasn't been able to reach agreement with its 
fellow IMF members on how to do it. When the IMF talks of "forgiving" 
debt, it isn't talking about any acts of magnanimous generosity on the 
part of the banks. It is talking about shifting the burden of payment 
from the debtor countries to the wealthier donor countries, or drawing 
on the IMF's gold reserves to insure that the banks get their money. In 
the fall of 2004, the United States decided that Iraq's $120 billion debt 
should be canceled; but if oil-rich Iraq merited debt cancellation, much 
poorer countries would too. Under the Heavily Indebted Poor Country 
(HIPC) Initiative of 1996, rich nations agreed to cancel $110 billion in 
debt to poor nations; but by the fall of 2004, only about $31 billion had 
actually been canceled. The thirty or so poorest nations, most of them 
in Africa, still had a collective outstanding debt of about $200 billion. 


Web of Debt 

At a meeting of finance ministers, the United States took the position 
that the debts of all the poorest nations should be canceled outright. 
The sticking point was where to get the funds. One suggestion was to 
revalue and sell the IMF's gold; but objection was raised that this would 
simply be another form of welfare to banks that had made risky loans, 
encouraging them to continue in their profligate loan-sharking. 2 

The Wizard of Oz might have said this was another instance of 
disorganized thinking. The problem could be solved in the same way 
that it was created: by sleight of hand. The debts could be canceled 
simply by voiding them out on the banks' books. No depositors or 
creditors would lose any money, because no depositors or creditors 
advanced their own money in the original loans. According to British 
economist Michael Rowbotham, writing in 1998: 

[0]f the $2,200 billion currently outstanding as Third World, 
or developing country debt, the vast majority represents money 
created by commercial banks in parallel with debt. In no sense 
do the loans advanced by the World Bank and IMF constitute 
monies owed to the "creditor nations" of the World Bank and 
IMF. The World Bank co-operates directly with commercial 
banks in the creation and supply of money in parallel with debt. 
The IMF also negotiates directly with commercial banks to 
arrange combined IMF/ commercial "loan packages." 

As for those sums loaned by the IMF from the total quotas 
supplied by member nations, these sums also do not constitute 
monies owed to "creditor" nations. The monies subscribed as 
quotas were initially created by commercial banks. Both quotas 
and loans are owed, ultimately, to commercial banks. 

If the money is owed to commercial banks, it was money created 
with accounting entries. Rowbotham observes that Third World debt 
represents a liability on the banks' books only because the rules of 
banking say their books must be balanced. He suggests two ways the 
rules of banking might be changed to liquidate unfair and oppressive 

The first option is to remove the obligation on banks to 
maintain parity between assets and liabilities, or, to be more 
precise, to allow banks to hold reduced levels of assets equivalent 
to the Third World debt bonds they cancel. Thus, if a commercial 
bank held $10 billion worth of developing country debt bonds, 
after cancellation it would be permitted in perpetuity to have a 


Chapter 45- Government With Heart 

$10 billion dollar deficit in its assets. This is a simple matter of 

The second option, and in accountancy terms probably the 
more satisfactory (although it amounts to the same policy), is to 
cancel the debt bonds, yet permit banks to retain them for 
purposes of accountancy. The debts would be cancelled so far 
as the developing nations were concerned, but still valid for the 
purposes of a bank's accounts. The bonds would then be held 
as permanent, non-negotiable assets, at face value. 3 

Third World debt could be eliminated with the click of a mouse! 

Stabilizing Exchange Rates 
in a Floating Sea of Trade 

Old debts can be wiped off the books, but the same debt syndrome 
will strike again unless something is done to stabilize national 
currencies. As long as currencies can be devalued by speculators, 
Third World countries will be exporting goods for a fraction of their 
value and over-paying for imports, keeping them impoverished. The 
U.S. dollar itself could soon be at risk. If global bondholders start 
dumping their bond holdings in large quantities, short sellers could 
fan the flames, collapsing the value of the dollar just as speculators 
collapsed the German mark in 1923. 

To counteract commercial risks from sudden changes in the value 
of foreign currencies, corporations today feel compelled to invest 
heavily in derivatives, "hedging" their bets so they can win either way. 
But derivatives themselves are quite risky and expensive, and they 
can serve to compound the risk. Some other solution is needed that 
can return predictability, certainty and fairness to international con- 
tracts. The Bretton Woods gold standard worked to prevent devalua- 
tions and huge trade deficits like the United States now has with China, 
but gold ultimately failed as a currency peg. The U.S. government 
(the global banker) had insufficient gold reserves for clearing interna- 
tional trade balances, and it eventually ran out of gold. Gold alone 
has also proved to be an unstable measure of value, since its own 
value fluctuates widely. Some new system is needed that retains the 
virtues of the gold standard while overcoming its limitations. 


Web of Debt 

From the Dollar Peg to "Full Dollarization"? 

One solution that has been tried is for countries to stabilize their 
currencies by pegging them directly to the U.S. dollar. The maneuver 
has worked to prevent currency devaluations, but the countries have 
lost the flexibility they needed to compete in international markets. In 
Argentina between 1991 and 2001, a "currency board" maintained a 
strict one-to-one peg between the Argentine peso and the U.S. dollar. 
The money supply was fixed, limited and inflexible. The dire result 
was national bankruptcy, in 1995 and again in 2001. 4 

In the extreme form of dollar pegging, called "full dollarization," 
the fully dollarized country simply abandons its local currency and 
uses only U.S. dollars. Ecuador converted to full dollarization in 2000, 
and El Salvador did it in 2002. 5 Certain benefits were realized, in- 
cluding reduced interest rates, reduced inflation, a stable currency, 
and a measure of economic growth. But when neighboring countries 
devalued their own currencies, the "dollarized" countries' products 
became more expensive and less competitive in global markets. 
Dollarized countries also lost the ability to control their own money 
supplies. When the El Salvador government incurred unexpected ex- 
penses, it could not finance them either by issuing its own currency or 
by issuing bonds that would be funded by its own banks, since neither 
the government nor the bankers had the ability to create dollars. The 
country's money supply was fixed and limited, forcing the govern- 
ment to cut budgeted programs to make up the difference; and that 
seriously hurt the poor, since welfare programs got slashed first. 

The Single Currency Solution 

Another proposed solution to the floating currency conundrum is 
for the world to convert en masse to a single currency. Proponents say 
this would do on a global level what the standardized dollar bill did 
on a national level for the United States, and what the Euro did on a 
regional level for the European Union. But critics point out that the 
world is not one nation or one region, and they question who would 
be authorized to issue this single currency. If all governments could 
issue it at will, the global money supply would be vulnerable to 
irresponsible governments that issued too much. If, on the other hand, 
the global currency could be issued only by a global central bank on 
the model of the IMF, the result would be the equivalent of "full 


Chapter 45- Government With Heart 

dollarization" for the world. Countries would not be able to issue 
their own currencies or draw on their own credit when they needed it 
for internal purposes. As in El Salvador, whenever they had crises 
that put unusual demands on the national budget, they would not 
have the option of generating new money to meet those demands. 
They would be forced to tighten their belts and pursue "austerity 
measures" or to borrow from the world central bank, with all the 
globalization hazards those compound-interest loans entail. 

There is, however, a third possibility. Rather than having to 
borrow the global fiat currency from a central bank at interest, nations 
might be authorized to draw on this credit interest-free. In effect, they 
would just be monetizing their own credit. We've seen that what has 
driven the Third World into inescapable debt is the compound-interest 
trap. Interest charges are estimated to compose about half the cost of 
everything produced. If interest to financial middlemen were 
eliminated, loans would merely be advances against future production, 
which could be repaid from that production. Borrowing nations would 
have to repay the money on a regular payment schedule, just as they 
do now; and they could not borrow more after a certain ceiling had 
been reached until old debts had been repaid. But without the burden 
of compound interest, they should be able to repay their loans from 
the goods and services produced — rents from housing, fees charged 
for publicly-developed energy and transportation, and so forth. 5 If 
they could not repay their loans, they could seek adjustments from 
the World Parliament; but decisions concerning when and how much 
to increase the national money supply with interest-free credit would 
otherwise be their own. That sort of model has been proposed by an 
organization called the World Constitution and Parliament 
Association, which postulates an Earth Federation working for equal 
prosperity and well-being for all Earth's citizens. The global funding 
body would be authorized not only to advance credit to nations but 
to issue money directly, on the model of Lincoln's Greenbacks and the 
IMF's SDRs. These funds would then be disbursed as needed for the 
Common Wealth of Earth. 6 

Some such radical overhaul might be possible in the future; but in 
the meantime, global trade is conducted in many competing currencies, 
which are vulnerable to speculative attack by pirates prowling in a 
sea of floating exchange rates. That risk needs to be eliminated. But 


Chapter 46 

[Sjuddenly they came to another gulf across the road. . . . [T]hey 
sat down to consider what they should do, and after serious thought the 
Scarecrow said, "Here is a great tree, standing close to the ditch. If the 
Tin Woodman can chop it down, so that it will fall to the other side, we 
can walk across it easily." 

"That is a first-rate idea," said the Lion. "One would almost 
suspect you had brains in your head, instead of straw." 

- The Wonderful Wizard ofOz, 
"The journey to the Great Oz" 

In his 1911 book The Purchasing Power of Money, Irving Fisher 
wrote that for money to serve as a unit of account, a trusted medium 
of exchange, and a reliable store of value, its purchasing power needs 
to be stable. But substances existing by the bounty of nature, such as 
gold or silver, cannot have that property because their values fluctuate 
with changing supply and demand. To avoid the disastrous 
devaluations caused by international currency speculation, 
governments need a single stable peg against which they can value 
their currencies, some independent measure in which merchants can 
negotiate their contracts and be sure of getting what they bargained 
for. Gold, the historical peg, was an imperfect solution, not only 
because the value of gold fluctuated widely but because gold also 
traded as a currency, and the "global banker" (the United States) 
eventually ran out. Some unit of value is needed that can stand as a 
lighthouse, resisting currency movements because it is independent 
of them. But what? The relationship between feet and meters can be 
fixed because the ground on which they are measured is solid, but 


Chapter 46 - Building a Bridge 

world trade ebbs and flows in a moving sea of currency values. 

A solution devised in the experimental cauldron of eighteenth cen- 
tury America was to measure the value of a paper currency against a 
variety of goods. During the American Revolution, troops were often 
paid with Continentals, which quickly depreciated as the economy 
was flooded with them. Meanwhile, goods were becoming scarce, 
causing prices to shoot up. By the time the Continental soldiers came 
home from a long campaign, the money in which they had been paid 
was nearly worthless. To ease the situation, the Massachusetts Bay 
legislature authorized the state to trade the Continentals for treasury 
certificates valued in terms of the sale price of staple commodities. 
The certificates provided that soldiers were to be paid "in the then 
current Money of the said State, in a greater or less Sum, according as 
Five Bushels of CORN, Sixty-eight Pounds and four-sevenths Parts of 
a Pound of BEEF, Ten Pounds of SHEEPS WOOL, and Sixteen Pounds 
of SOLE LEATHER shall then cost, more or less than One Hundred 
and Thirty Pounds current Money, at the then current Prices of said 
Articles." 1 

Nearly two centuries later, John Maynard Keynes had a similar 
idea. Instead of pegging currencies to the price of a single precious 
metal (gold), they could be pegged to a "basket" of commodities: wheat, 
oil, copper, and so forth. Keynes did not elaborate much on this solu- 
tion, perhaps because the world economy was not then troubled by 
wild currency devaluations, and because the daily statistical calcula- 
tions would have been hard to make in the 1940s. But that would not 
be a problem now. As Michael Rowbotham observes, "With today's 
sophisticated trading data, we could, literally, have a register of all 
globally traded commodities used to determine currency values." 
Rowbotham calls Keynes' proposal a profound and democratic idea 
that is vital to any future sustainable and just world economy. He 

Today, wheat grown in one country may, due to a devalued 
currency, cost a fraction of wheat grown in another. This leads 
to the country in which wheat is cheaper becoming a heavy 
exporter - regardless of need, or the capacity to produce better 
quality wheat in other locations. In addition, currency values 
can change dramatically and the situation can reverse. Critically, 
such wheat "prices" bear no relation to genuine comparative 
advantage of climate, soil type, geography and even less to 
indigenous/local/regional needs. Neither does it have any 


Web of Debt 

stabilising element that would promote a long-term stability of 
production with relation to need. . . . [B]y imputing value to a 
nation's produce, and allowing this to determine the value of a 
nation's currency, one is imputing value to its resources, its 
labourers and acknowledging its own needs. 2 

An international trade unit could be established that consisted of 
the value of a basket of commodities broad enough to be representative 
of national products and prices and to withstand the manipulations 
of speculators. This unit would include the price of gold and other 
commodities, but it would not actually be gold or any other commodity, 
and it would not be a currency. It would just be a yardstick for pegging 
currencies and negotiating contracts. A global unit for pegging value 
would allow currencies to be exchanged across national borders at 
exact conversion rates, just as miles can be exactly converted into 
kilometers, and watches can be precisely set when crossing 
international date lines. Exchange rates would not be fixed forever, 
but they would be fixed everywhere. Changes in exchange rates would 
reflect the national market for real goods and services, not the 
international market for currencies. Like in the Bretton Woods system 
that pegged currencies to gold, there would be no room for speculation or 
hedging. But the peg would be more stable than in the Bretton Woods 
system; and because it would not trade as a currency itself, it would 
not be in danger of becoming scarce. 

Private Basket-of-Commodities Models 

To implement such a standard globally would take another round 
of Bretton Woods negotiations, which might not happen any time soon; 
but private exchange systems have been devised on the same model, 
which are instructive in the meantime for understanding how such a 
system might work. 

Community currency advocate Tom Greco has designed a "credit 
clearing exchange" that expands on the LETS system. It involves an 
exchange of credits tallied on a computer, without resorting to physi- 
cal money at all. Values are computed using a market basket stan- 
dard. The system is designed to provide merchants with a means of 
negotiating contracts privately in international trade units, which are 
measured against a basket of commodities rather than in particular 
currencies. Greco writes: 


Chapter 46 - Building a Bridge 

The use of a market basket standard rather than a single 
commodity standard has two major advantages. First, it 
provides a more stable measure of value since fluctuation in the 
market price of any single commodity is likely to be greater than 
the fluctuation in the average price of a group of commodities. 
The transitory effects of weather and other factors affecting 
production and prices of individual commodities tend to average 
out. Secondly, the use of many commodities makes it more 
difficult for any trader or political entity to manipulate the value 
standard for his or her own advantage. 3 

In determining what commodities should be included in the basket, 
Greco suggests the following criteria. They should be (1) traded in 
several relatively free markets, (2) traded in relatively high volume, (3) 
important in satisfying basic human needs, (4) relatively stable in price 
over time, and (5) uniform in quality or subject to quality standards. 
Merchants using the credit clearing exchange could agree to accept 
payment in a national currency, but the amount due would depend 
on the currency's value in relation to this commodity-based unit of 
account. Once the unit had been established, the value of any currency 
could be determined in relation to it, and exchange rates could be 
regularly computed and published for the benefit of traders. 

Bernard Lietaer has proposed a commodity-based currency that 
he calls "New Currency," which could be initiated unilaterally by a 
private central bank without the need for new international agree- 
ments. The currency would be issued by the bank and backed by a 
basket of from three to a dozen different commodities for which there 
are existing international commodity markets. For example, 100 New 
Currency could be worth 0.05 ounces of gold, plus 3 ounces of silver, 
plus 15 pounds of copper, plus 1 barrel of oil, plus 5 pounds of wool. 
Since international commodity exchanges already exist for those re- 
sources, the New Currency would be automatically convertible to other 
national currencies. 4 Lietaer has also proposed an exchange system 
based on a basket-of-commodities standard that could be used pri- 
vately by merchants without resorting to banks. Called the Trade 
Reference Currency (TRC), it involves the actual acquisition of com- 
modities by an intermediary organization. The details are found on 
the TRC website at 


Web of Debt 

Valuing Currencies Against the Consumer Price Index 

Money reform advocate Frederick Mann, author of The Economic 
Rape of America, had another novel idea. In a 1998 article, he 
suggested that a private unit of exchange could be valued against either 
a designated basket of commodities or the Commodity Research Bureau 
Index (CRB) or the Consumer Price Index (CPI). Using standardized 
price indices would make the unit particularly easy to calculate, since 
the figures for those indices are regularly reported around the world. 

Mann called his currency unit the "Riegel," after E. C. Riegel, who 
wrote on the subject in the first half of the twentieth century. For the 
"basket" option, Mann proposed using cattle, cocoa, coffee, copper, 
corn, cotton, heating oil, hogs, lumber, natural gas, crude oil, orange 
juice, palladium, rough rice, silver, soybeans, soybean meal, soybean 
oil, sugar, unleaded gas, and wheat, in proportions that worked out 
to about $1 million in American money. This figure would be divided 
by 1 million to get 1 Riegel, making the Riegel worth about $1 in Ameri- 
can money. 

Another option would be to use the Commodity Research Bureau 
Index, which includes gold along with other commodities. But Mann 
noted that the CRB would give an unrealistic picture of typical prices, 
because individuals don't buy those commodities on a daily basis. A 
better alternative, he said, was the Consumer Price Index, which tal- 
lies the prices of things routinely bought by a typical family. In the 
United States, CPI figures are prepared monthly by the U.S. Bureau of 
Labor Statistics. Prices used to calculate the index are collected in 87 
urban areas throughout the country and include price data from ap- 
proximately 23,000 retail and service establishments, and data on rents 
from about 50,000 landlords and tenants. 

When Mann was writing in 1998, the CPI was about $160. He 
suggested designating 1 Riegel as the CPI divided by 160, which would 
have again made it about $1 in 1998 prices. 5 Converting the cost of 
one Riegel' s worth of goods in American dollars to the cost of those 
goods in other currencies would then be a simple mathematical 
proposition. The CPI's "core rate," which is used to track inflation, 
currently excludes goods with high price volatility, including food, 
energy, and the costs of owning rather than renting a home. 6 But to 
be a fair representation of the consumer value of a currency at any 
particular time, those essential costs would need to be factored in as 


Chapter 46 - Building a Bridge 

A New Bretton Woods? 

These proposals involve private international currency exchanges, 
but the same sort of reference unit could be used to stabilize exchange 
rates among official national currencies. Several innovators have 
proposed solutions to the exchange rate problem along these lines. 
Besides Michael Rowbotham in England, they include Lyndon 
LaRouche in the United States and Dr. Mahathir Mohamad in 
Malaysia, two political figures who are controversial in the West but 
are influential internationally and have some interesting ideas. 

LaRouche shares the label "perennial candidate" with Jacob Coxey, 
having run for U.S. President eight times. He also shares a number of 
ideas with Coxey, including the proposal to make cheap national credit 
available for putting the unemployed to work developing national in- 
frastructure. LaRouche has launched an appeal for a new Bretton 
Woods Conference to reorganize the world's financial system, a plan 
he says is endorsed by many international leaders. It would call for: 

1. A new system of fixed exchange rates, 

2. A treaty between governments to ban speculation in derivatives, 

3. The cancellation or reorganization of international debt, and 

4. The issuance of "credit" by national governments in sufficient quan- 

tity to bring their economies up to full employment, to be used for 
technical innovation and to develop critical infrastructure. 7 
La Rouche's proposed system of exchange rates would be based 
on an international unit of account pegged against the price of an 
agreed-upon basket of hard commodities. With such a system, he 
says, it would be "the currencies, not the commodities, [which are] 
given implicitly adjusted values, as based upon the basket of com- 
modities used to define the unit." 8 

Dr. Mahathir is the outspoken Malaysian prime minister credited 
with sidestepping the "Asian crisis" that brought down the economies 
of his country's neighbors. (See Chapter 26.) The Middle Eastern 
news outlet Al Tazeera describes him as a visionary in the Islamic 
world, who has proven to be ahead of his time. 9 As noted earlier, 
Islamic movements for monetary reform are of particular interest today 
because oil-rich Islamic countries are actively seeking alternatives for 
maintaining their currency reserves, and they may be the first to break 
away from the global bankers' private money scheme. In international 
conferences and forums, Islamic scholars have been vigorously debating 


Web of Debt 

monetary alternatives. 

In 2002, Dr. Mahathir hosted a two-day seminar called "The Gold 
Dinar in Multilateral Trade," in which he expounded on the Gold 
Dinar as an alternative to the U.S. dollar for clearing trade balances. 
Islamic proposals for monetary reform have generally involved a return 
to gold as the only "sound" currency, but Dr. Mahathir stressed that 
he was not advocating a return to the "gold standard," in which paper 
money could be exchanged for its equivalent in gold on demand. 
Rather, he was proposing a system in which only trade deficits would 
be settled in gold. A British website called "Tax Free Gold" explains 
the proposed Gold Dinar system like this: 

It is not intended that there should be an actual gold dinar coin, 
or that it should be used in everyday transactions; the gold dinar 
would be an international unit of account for international settlements 
between national banks. If for example the balance of trade 
between Malaysia and Iran during one settlement period, 
probably three months, was such that Iran had made purchases 
of 100 million Malaysian Ringgits, and sales of 90 million Ryals, 
the difference in the value of these two amounts would be paid 
in gold dinars. . . . From the reports of the Malaysian conferences, 
we deduce that the gold dinar would be one ounce of gold or its 
equivalent value. 10 

At the 2002 seminar, Dr. Mahathir conceded that gold's market 
value is an unsound basis for valuing the national currency or the 
prices of national goods, because the value of gold is quite volatile and 
is subject to manipulation by speculators just as the U.S. dollar is. He 
said he was thinking instead along the lines of a basket-of-commodi- 
ties standard for fixing the Gold Dinar's value. Pegging the Dinar to 
the value of an entire basket of commodities would make it more stable 
than if it were just tied to the whims of the gold market. The Gold 
Dinar has been called a direct challenge to the IMF, which forbids 
gold-based currencies; but that charge might be circumvented if the 
Dinar were actually valued against a basket of commodities, as Dr. 
Mahathir has proposed. It would then not be a gold "currency" but 
would be merely an international unit of account, a standard for mea- 
suring value. 


Chapter 46 - Building a Bridge 

The Urgent Need for Change 

Other Islamic scholars have been debating how to escape the debt 
trap of the global bankers. Tarek El Diwany is a British expert in 
Islamic finance and the author of The Problem with Interest (2003). 
In a presentation at Cambridge University in 2002, he quoted a 1997 
United Nations Human Development Report underscoring the mas- 
sive death tolls from the debt burden to the international bankers. 
The report stated: 

Relieved of their annual debt repayments, the severely indebted 
countries could use the funds for investments that in Africa alone 
would save the lives of about 21 million children by 2000 and 
provide 90 million girls and women with access to basic 
education. 11 

El Diwany commented, "The UNDP does not say that the bankers 
are killing the children, it says that the debt is. But who is creating the 
debt? The bankers are of course. And they are creating the debt by 
lending money that they have manufactured out of nothing. In return the 
developing world pays the developed world USD 700 million per day 
net in debt repayments." 12 He concluded his Cambridge presentation: 

But there is hope. The developing nations should not think that 
they are powerless in the face of their oppressors. Their best 
weapon now is the very scale of the debt crisis itself. A 
coordinated and simultaneous large scale default on international 
debt obligations could quite easily damage the Western monetary 
system, and the West knows it. There might be a war o